Empirical evidence regarding international relative prices at the consumer level suggests that arbitrage in international markets is not rapid and that these markets are highly segmented. In fact, even markets for traded goods appear to be highly segmented internationally: In the data, both real exchange rate movements and deviations from the law of one price for traded goods are large and persistent. Nontraded goods, in the form of ¯nal consumption goods and as an input into the production of ¯nal tradable goods, are an important aspect behind international relative price di®erentials for at least three reasons. First, international price di®erentials for these goods are not subject to.
