Write a 2 pages paper on ikea prices. IKEA Prices Contents Contents 2 Overview 3 Question 4 Question 2 4 Question 3 6 Reference 7 Overview The assignment shows the different prices of same product in different countries. In this assignment a product of IKEA i.e. IKEA 365 + Gnistra Bread Knife has been taken for comparing the prices among three countries which are Australia, Canada and United States. The purpose is to analyze that for what reason the prices are different in different country. Price comparison of IKEA 365 + Gnistra Bread Knife with different economies Source: (IKEA Systems, 2011) Question 1 Are the prices after conversion to U.S. dollars identical? If not, in which country is the product cheaper than it is in the United States. In which country is it more expensive? The prices of IKEA products are not identical and vary in different countries after converting the price in USD. For comparing the prices of IKEA 365 + Gnistra Bread Knife, three different countries have been chosen namely Australia, Canada and United States. Among these three countries, USA has the cheapest price which is 12.99 USD. After converting the price in USD, the price of 365 + Gnistra Bread knife of Canada has become 17.4532 USD and in Australia the figure is 18.2721 USD. So, Australia’s cost for this particular product is expensive compared to other two countries (IKEA Systems, 2011). Question 2 What might be the reason for the prices to differ even after conversion to U.S. dollars? Individual product costs differ from one country to another. The conventional reasons for difference in price level are the exchange rates and prices of labor. Wage distribution at mean level has significant negative effect on product prices. The high currency conversion rate of various countries is related with higher prices. The high income generating countries enjoy large productivity advantage (Lipse & Swedenborg, 2007). Trade cost can determine the cost of product. Trade cost has two components, one being transportation cost and other is distribution cost. The intensity of transportation cost varies from country to country which in turn can determine cost of final product. Transportation cost can further be divided into two categories namely direct transportation cost and indirect transportation cost. The direct transportation costs are freight charges and insurance charges and indirect transportation costs are holding cost, stock cost and preparation cost (Inanc, 2010). The indirect taxes imposed on products sold in various countries are another reason for price differences between countries. Every country has their trade barriers on individual product. it is an important reason for price difference. Besides these factors, the customers’ needs and preferences, government’s regulation and availability of raw material can affect the prices of products in different countries (Inanc, 2010). Question 3 Why should you expect the prices to be the same? There are different exchange rates in different countries. The prices of same product should be same in different countries, because if there is price difference between countries, people might take benefit of it. They will buy product in cheap market and might sell them in the comparatively expensive market. These people are basically known as ‘Commodity Arbitragers’. For this reason, there are tariff restrictions in different countries. When these tariffs are applied equally to potential sources, they cannot cause price differences. The ‘Law of One Price’ theory provides the answer that prices are actually same when they are in different foreign currencies. If the price of the product is converted in a common currency like USD in the absence of shipping cost, tariff rate, and other local sales tax the figure will be the same in every country. Because of the above factors there are different prices in different countries and various trade restrictions (Levi, 2009). Reference Levi, M. D., (2009). Business & Economics. International Finance. Retrieved Online on March 04, 2011 from http://books.google.co.in/books?id=utH02F6OuO4C&pg=PA102&lpg=PA102&dq=reason+for+different+price+of+same+product+in+different+country&source=bl&ots=yqv4kC87SM&sig=OI_qTGosUN6Ic0OujWcTTddHYxo&hl=en&ei=VJJwTeuyOo_QcaHpzPgC&sa=X&oi=book_result&ct=result&resnum=8&sqi=2&ved=0CEkQ6AEwBw#v=onepage&q&f=true Lipse, R. E. & Swedenborg, B., (2007). Explaining Product Price Differences across Countries. National Bureau of Economic Research. Retrieved Online on March 04, 2011 from http://www.nber.org/papers/w13239.pdf Inanc, O., (2010). Product Differentiation and Price Dispersion. Isik University, Turkey. Retrieved Online on March 04, 2011 from http://www.gimi.us/CLUTE_INSTITUTE/ORLANDO_2010/Article%20185.pdf IKEA Systems, (2011). IKEA 365+ knife series. Categories. Retrieved Online on March 04, 2011 from http://www.IKEA.