Testing the Law of One Price A Comparison between Pakistan and Australia

Abstract

The paper tests the validity of the Law of One Price (LOP) for 
Pakistan and Australia, where primary commodities constitute 
a substantial part of these countries’ exports. This paper 
conducts co-integration analysis to determine the validity of 
the LOP in the long run. The study deals with the relative 
purchasing power parity approach to the analysis of exchange 
rate and relative prices, and covers the period from 1972-
1997. The study documents the evidence generally supportive 
of the law.