Need Expert Opinion: What will happen if there are no limitations to export / import taxes (arbitrage benefits)?

As far as our Understanding goes the basics of Exchange Rates, PPP, Arbitrage benefits and Limitations are as follows,

exchange rates 

For example say the price of one Cricket bat in US is 10$. If you convert the price keeping exchange rate (ex: 1USD = 50 INR) in mind then in India it should cost Rs.500 (ie. 10*50). But in India one a bat is sold at say Rs.250 which is equivalent to only 5 USD. So if anyone from US can access Indian market direct then they can buy from India and save 5$.

Here comes PPP. If India and US are in equilibrium, either India should sell the bat @ Rs.500 or US should sell the bat @ 5$. But we are not in equilibrium and US economy is better than that of India’s.

So there come the Limitations to restrict one nation to take such advantages called arbitrage benefits by purchasing from other nations, when there is no equilibrium and lesser prices. The Limitations usually are Import / Export Taxes, custom duties, Transport charges etc. So as to bring some equilibrium

What If  there are no limitations? What will happen?

Experts please share your comments…  and explain.

One thought on “Need Expert Opinion: What will happen if there are no limitations to export / import taxes (arbitrage benefits)?

  1. Pingback: ‘Snoopy’ Digs the Archive for You: May 2013 | PROPEL STEPS

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