Final answer:
The real exchange rate is 1.33 CAD/USD, indicating that you need 1.33 Canadian dollars to buy what one U.S. dollar can buy. At the market exchange rate of 0.80 USD/CAD, the book would effectively cost $18.75 USD in Canada, making it a better purchase in the United States for $15 USD.
Step-by-step explanation:
Given that the CAD-USD exchange rate is 0.80 USD/CAD, to find the real exchange rate or home/foreign terms of trade, we can compare how many units of the domestic currency (CAD) are needed to purchase an internationally traded good (the book) compared to the number of units of the foreign currency (USD). Considering that the book costs $15 USD or $20 CAD, the real exchange rate can be determined by the ratio of the prices in both currencies. Thus, the real exchange rate is 20 CAD / 15 USD, which simplifies to 1.33 CAD/USD. This indicates that you need 1.33 Canadian dollars to buy what one U.S. dollar can buy. Since the given market exchange rate is 0.80 USD/CAD, to buy the book in Canada you would exchange 1 USD for 1.25 CAD (1/0.80 = 1.25), totaling $20 CAD for the book, as 15 USD * 1.25 CAD/USD = 18.75 CAD. So, in this case, it's a better deal to purchase the book in the United States where it costs $15 USD, as opposed to Canada where you would effectively pay an equivalent of $18.75 USD at the market exchange rate.