If purchasing power parity holds, the real exchange rate is always equal to 1.

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If purchasing power parity holds, the real exchange rate between two countries will always be equal to 1. This means that the exchange rate between two currencies takes into account the differences in the countries' inflation rates, so that the same basket of goods costs the same in both countries. When the real exchange rate is equal to 1, it means that the exchange rate is in line with what the purchasing power parity theory predicts. However, this is not always the case in practice.

If Purchasing Power Parity Holds, the Real Exchange Rate Is