Last Updated on Monday, 22 February 2010 06:34 Written by admin Monday, 22 February 2010 06:34

What is a tradable good?

A tradable good is a good that can easily be sold in a location other than where it was produced. Tradable and non-tradable goods do not fall into two distinct categories but rather they fall on a continuum with some goods being perfectly tradable (like a share of stock or currency), some being perfectly untradable (like a haircut), and most other goods falling somewhere in the middle. Prepared food is not usually considered a tradable good because it’s hard to transport.

What factors contribute to a good’s “tradability” or lack of “tradability”?

Goods that have long shelf lives, and less transportation costs are typically thought of as tradable. Likewise, goods that perish quickly or are cumbersome or very expensive to transport fall on the “non-tradable” end of the spectrum.

What does this have to do with the Big Mac Index?

Non-tradable goods are less subject to the “law of one price” than tradable goods. Another way of saying that is that Purchasing Power Parity does not necessarily hold for non-tradable goods since the opportunity for arbitrage are less. For PPP (and the law of one price) to hold, there must be an effecient market like the foreign exhange market or a stock market. This doesn’t mean that the Big Mac Index is an ineffective measure of PPP or the value of currencies. It simply means that the Big Mac Index, like any other measure of economic comparison is subject to limitations and should be thought of as such.