Global and Ethiopian Cereal Prices: Does the Law of One Price hold in the long run?

Abstract

Like many other countries in the world, Ethiopia is currently facing significant challenges with high food prices. The high food prices affect cereals such as teff, sorghum, and maize which are staple foods in the Ethiopian diet. This study investigates the relationship between cereal prices in Ethiopia and the world market price of cereals. To study the price relationship, the Law of One Price (LOP) is used, stating that prices in different markets should, in perfectly competitive markets with the absence of transportation costs, be equalized. The data used are the Consumer Price Index (CPI) of cereals in Ethiopia, the world market price index of cereals, and the exchange rate between Ethiopian birr (ETB) and US dollar (USD) between January 1998 and December 2022. The Engle and Granger cointegration analysis was used to test for the long-term relationship between domestic and international cereal prices. A key finding is that there are long-term relationships between domestic and international prices, indicating that the LOP holds in the long run.