The Effect of Trade Credit on Price and Price Level Comparisons

The comparison of prices and price levels is an important element in many economic forecasts, policy prescriptions, and empirical academic studies. There is an important correlation between price comparisons and trade credit. A model is presented which links transactions prices and trade credit. The model shows that the prices of identical goods will differ, even in very efficient markets for goods and capital, if credit terms differ. Consequently, apparent arbitrage profits may disappear when prices are adjusted for the value of trade credit extended to finance the goods. The model adjusts for the extension of trade credit, and this adjustment may be applied at either macroeconomic or firm-specific levels. The impact of trade credit on international price comparisons can be estimated by using actual maturities and interest rate differentials.