Suppose purchasing power parity (PPP) depends only on hotel rooms. The exchange rate is C$1.00 = US$0.80 and a room at the Weston Hotel in Niagara Falls, New York costs US$200. PPP suggests that the price of a room at the Weston Hotel in Niagara Falls, Ontario should be C$250.

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According to PPP, the price of a hotel room in one country should be equivalent to the price of a hotel room in another country after adjusting for the exchange rate. In this case, C$1.00 = US$0.80 suggests that the Canadian dollar is undervalued by 20% relative to the US dollar. Therefore, the price of a US$200 room in Niagara Falls, New York should be C$250 in Niagara Falls, Ontario to account for the exchange rate and maintain PPP.

Suppose Purchasing Power Parity (PPP) Depends Only on Hotel Rooms