Recently, a certain argument has been circulating, claiming that the RMB exchange rate is seriously undervalued. The evidence cited is that McDonald's hamburgers are so cheap in China that they have no friends, while they are sold very expensively abroad. At first glance, this logic seems reasonable, but the underlying economic theory is actually full of flaws.

This theory is called Absolute Purchasing Power Parity, which holds that the prices of the same goods should be the same worldwide, and exchange rates are used to balance the price differences. The problem is, reality is much more complicated than that.

**First Pitfall: Not all goods are applicable**

The law of one price only applies to goods that can be traded internationally. Can you ship a hamburger from the US to China for sale? Obviously not. Local service costs, labor expenses, rent, and other factors vary. Price differences in non-tradable goods do not reflect exchange rate issues.

**Second Pitfall: Even tradable goods face many restrictions**

For tradable goods to satisfy the law of one price, ideal conditions such as zero transportation costs, zero tariffs, and perfect competition are required. In reality? Tariffs, transportation costs, information asymmetries, and market monopolies exist. When these factors are present, the price equilibrium mechanism breaks down.

**Third Pitfall: This is just the tip of the iceberg**

More importantly, the scale of global foreign exchange trading far exceeds international trade. Daily foreign exchange transactions amount to trillions of dollars, driven mainly by capital flows, interest rate differentials, and risk hedging, which have little to do with hamburger prices. Focusing solely on commodity prices to judge the exchange rate level is like only looking at stock trading volume while ignoring the movements of major funds—missing the main point entirely.

So next time you hear this kind of argument, don’t rush to believe it. Exchange rates are determined by a complex system of supply and demand, capital flows, and policy expectations—things that cannot be explained by restaurant menus.