Testing Purchasing Power Parity Hypothesis for Azerbaijan

The Purchasing Power Parity (PPP) hypothesis predicts that exchange rates are
determined by the purchasing power of national currencies. This hypothesis
implies equalization or co-movement of foreign and domestic good prices in longrun
when prices expressed in the same currency, although there can be short-run
deviations. The PPP hypothesis can be seen as international form of the law of one
price. Under some assumptions, the law of one price foresees that identical goods
must have the same prices in different markets. Transaction cost such as
transportation, restrictions on free trade like quotas and custom tariffs, arbitrage
preventing constraints can invalidate the PPP hypothesis. As well as price and
exchange rate interventions, the presence of nontradable goods, the volume of
initially-invested capital and differences between the goods or their weights
included in the price indices of countries may cause to the PPP deviations or may
cause not to guarantee the PPP hypothesis.