Arbitrage in General Equilibrium

Oscar Varela

Department of Economics and Finance, University of Texas at El Paso, El Paso, USA.

DOI: 10.4236/me.2012.34051                

Abstract

Normal trade in goods assumes two sectors that co-exist for reasons such as comparative advantage and interact via trade. Arbitrage trade in goods assumes two markets that artificially exist and converge via trade. Restoration of the law of one price via arbitrage creates one sector out of two, and in general equilibrium, equalizes opportunity cost of resources used in production. Arbitrage does not occur in a vacuum, such that when the high (low) price of a good decreases (increases) in its artificially segmented market during arbitrage, the supply of the good falls (rises), the resources used intensively in that good earn lower (higher) returns, affecting security prices, and the supply of those resources in that good’s production fall (rise).

Keywords

General Equilibrium; Arbitrage

Conflicts of Interest

The authors declare no conflicts of interest.

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