Tradability is the property of a
good or
service
Service may refer to:
Activities
* Administrative service, a required part of the workload of university faculty
* Civil service, the body of employees of a government
* Community service, volunteer service for the benefit of a community or a pu ...
that can be sold in another location distant from where it was produced. A good that is not tradable is called non-tradable. Different goods have differing levels of tradability: the higher the cost of transportation and the shorter the shelf life, the less tradable a good is. Prepared food, for example, is not generally considered a tradable good; it will be sold in the city in which it is produced and does not directly compete with other cities' prepared foods. Some non-commodities and services such as
haircuts and
massages are also obviously non-tradable. However, in recent years even pure services such as
education can be regarded as tradable due to advancements in
information and communications technology.
Price equalization
Perfectly tradable goods, like shares of stock, are subject to the
law of one price: they should cost the same amount wherever they are bought. This law requires an
efficient market. Any discrepancy that may exist in pricing perfectly tradable goods because of
foreign exchange market
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...
movements, for instance, is called an
arbitrage
In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between the ...
opportunity. Goods that cannot be costlessly traded are not subject to this law.
Less than perfectly tradable goods are subject to distortions such as the
Penn effect, for example, a lowering of prices in less wealthy place. Perfectly non-tradable goods are not subject to any leveling of price, thus the disparity between similar parcels of
real estate in different locations.
There should be no distortions in
purchasing power parity
Purchasing power parity (PPP) is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries' currency, currencies. PPP is effectively the ratio of the price of ...
for perfectly tradable goods. The differences between it and other methods are the result of non-tradable goods and the above-mentioned Penn effect.
References
Trade
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