The Law of One Price and the Iraq War

There are a number of different ways to measure progress in Iraq, from casualties to Iraqi security force strength to oil production levels. Now, a pair of clever researchers have added another metric to the mix.

In economics, the Law of One Price states that the cost of the same good in two different markets should be same, except for the transportation costs between them. So whether I'm in Seattle or Kansas City, all else equal, a pack of gum should cost about the same.

Due to the insurgency in Iraq, security concerns have hurt the development of integrated markets across regions.

But in recent months, President Bush has been trumpeting the success of the surge in quelling resistance forces. And looking at the decline in violence in lends some support to his case. But has the surge also helped economic integration? One way to find out is to see how the prices of the same goods in different parts of Iraq have moved since the surge.

Looking at weekly price data for 255 goods like beef, fish, and eggs between 2005 and 2008, S. Brock Blomberg of Claremont McKenna College and Rozlyn Engel of the U.S. Military Academy found out three things:

The dispersion of prices in Iraq has been roughly the twice the level of price disparities in the United States or Japan.
Regions with the largest U.S. military presence, which presumably brings greater security, saw the least amount of price dispersion.
And most importantly, price dispersion fell by about 11 percent after the surge started in February 2007, but picked up again after the surge ended in November, though at a slower pace.

The following chart from Blomberg and Engel's working paper, to be presented tomorrow at the NBER Summer Institute, shows that the national level of price dispersion seems to fall during the surge but rises afterward:

Blomberg and Engel believe that it's less religious differences between different areas that are driving the results than the impact of violence on developing markets.

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