Recently, many people have been using the price of McDonald's hamburgers as an example, claiming that China is cheaper and the US is more expensive, thus inferring that the RMB is severely undervalued. It sounds reasonable, but this logic is actually full of flaws.

The theory behind this is called absolute purchasing power parity, which centers on the so-called law of one price—after converting with the exchange rate, the prices of the same goods should be the same worldwide. Just listen, but in reality, it's far from that simple.

Why is it unreliable? There are at least three issues that can't be ignored. First, the law of one price only applies to tradable goods; non-tradable services simply don't fit. Second, even when considering only tradable goods, the conditions for the law of one price to hold are extremely strict—factors like shipping costs, taxes, and information costs are difficult to eliminate in practice. Most importantly, the scale of global foreign exchange trading has long surpassed that of international trade, so clinging to hamburger prices to judge exchange rates is indeed a bit outdated.

The variables involved in exchange rates are too numerous; simply and crudely applying the goods price theory can only be self-deception.