For whatever underlying reasons, imagine that at least two major trading nations display substantially different internal inflation rates
affecting prices of both traded and non-traded goods. If the rate of
exchange of one nation's currency for that of the other is fixed, relative prices across the border would be changing at a rate equal to the difference between the two inflation rates. For example, if the
U.S. inflation rate is 10 percent and the West German rate is 7 percent, then relative prices for U.S. goods would be rising by 3 percent
per year in terms of German currency. Similarly, relative prices for German goods in U.S. currency would be falling at 3 percent
per year.