If the levels of the aggregate consumer price indexes (CPIs) were found to be the same, adjusted for the $ exchange rate, the blue shaded area in Chart 1 would collapse to a single flat line and lie on the zero axis.1 In other words, the purchasing power of the Canadian dollar in each country would have been equalized.
For this reason, the relationship is often referred to as the purchasing-power-parity (PPP) condition. 1  The price gap – or the shaded blue area – in Chart 1 is defined as the ratio of Canadian to U.S. CPI (the U.S. CPI converted to Canadian dollars) benchmarked to 2007 using the Bank’s Internet survey.