The starting point for understanding how exchange rates are determined is a simple idea called which states: if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it.

LOOP, i.e., Law of One Price

Explanation:

The Law of One Price deals with the pricing of an identical good at different places.

This law states that the price of an identical commodity, asset, goods or security is the same irrespective of the place or the location, if no trade friction is there like that of transport costs, etc or if the market is a free market while taking the rate of exchange of currency into consideration.

Thus two countries producing an identical good and still the price of the good can be same through out the globe.

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