Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$2.00 in Canada and US$1.50 in the U.S. PPP suggests that the

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According to PPP, the exchange rate should equal the ratio of the price of goods in each country. In this case, the exchange rate should be C$2.00/US$1.50 = C$1.33 = US$1.00. Since the actual exchange rate is C$1.00 = US$0.80, the Canadian dollar is overvalued relative to the US dollar. This suggests that the supply of Canadian dollars may increase if people start selling them to buy US dollars, which would result in a decrease in the value of the Canadian dollar.

Suppose Purchasing Power Parity (PPP) Depends Only on Hamburgers