This is the last iPod touch.
The touch doesn't fit into the iPod family. It is closer to an iPad.
The nano and shuffle will be left as music players.
The iPod touch will get a bigger screen, a lightning headphone connector, and become part of the iPad range with wifi only, and wifi/cellular options.
I think the touch plays very nicely into the lineup of iOS devices. You are right, it is more of a iPad nano in this day and age, but I think they will keep the iPod lineage and screen size. The term iPod hasn't been limited to just music since the iPod photo.
The touch is the affordable entry point into Apple's whole ecosystem: Music, Apps, TV shows, Movies, Books... There are just as many ways to spend more money on an iPod Touch as there are on an iPhone/iPad. Having a low end, low price, high margin device that people who can't afford or don't need your flagship product will buy, but gets them sinking money into something that is pure profit for you? If you were Apple, how could you say no to that?
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The prices for the iPod Touch in Canada used to be the same as the one in the US, but the price cuts have made a price difference in the US and Canada. 16gb is $219, 32gb is $269, and 64gb is $319.
At the current exchange rate those prices are within a few dollars of being spot on.