The economic theory that explains exchange rate movements by looking at the relative prices in one country versus another is

Question

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Purchasing power parity theory suggests that the exchange rate between two countries should adjust so that a basket of goods costs the same in both countries when measured in the same currency. If the price of a basket of goods is higher in one country than another, their exchange rates should adjust so that the country with the higher prices has a weaker currency, and the country with lower prices has a stronger currency. This theory assumes that transportation costs, trade barriers, and other factors are minimal or non-existent.

The Economic Theory That Explains Exchange Rate Movements by Looking