According to the theory of purchasing-power parity, the real exchange rate defined as foreign goods per unit of Canadian goods will equal the domestic price level divided by the foreign price level.

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The theory of purchasing-power parity (PPP) suggests that in the long run, exchange rates should adjust to equalize the price of identical goods and services in any two countries. The real exchange rate, however, is typically defined as the nominal exchange rate adjusted for differences in price levels between countries, not as the domestic price level divided by the foreign price level. The PPP implies that the real exchange rate should approach unity (or one) when price levels are adjusted, meaning the purchasing power is equalized, but it does not define the real exchange rate in the manner described.

According to the Theory of Purchasing-Power Parity, the Real Exchange