The “law of one price” proposes that identical, tradable goods should have similar prices across efficient markets once prices are expressed in a common currency. Real-world taxes, shipping costs, retail margins and market barriers mean that the relationship is rarely exact.
From burgers to tablets
A familiar informal test of purchasing-power parity compares the local price of the same fast-food product in different economies. The method is easy to understand, but prepared food cannot be moved efficiently between countries. That limits the arbitrage that might otherwise narrow price differences.
The 2014 analysis considered an iPad mini instead. A standardised, portable device appeared closer to the theory's assumptions because it could travel across borders more readily than a restaurant meal. Even so, its shelf price still reflected local taxes, distribution arrangements, warranties and pricing strategy.
What purchasing-power parity asks
After converting local prices into one currency, does an equivalent basket—or in this case one standardised product—cost broadly the same amount? A gap may indicate currency misalignment, but it may also reflect taxes, trade frictions and non-currency costs.
What the 2014 snapshot suggested
In the price comparison used at the time, the renminbi appeared close to fair value against the US dollar. That result contrasted with the prominent policy debate then surrounding China's exchange rate and trade position.
The same comparison showed a considerably higher French retail price than the US price. The reported difference was nearly 16% after conversion, leading the original analysis to characterise the euro as overvalued through the narrow lens of this product index.
The product-price comparison placed the Chinese currency close to parity with the dollar in this specific 2014 snapshot.
The French price was reported as almost 16% above the comparable US price after currency conversion.
Why monetary policy entered the argument
Euro-area inflation was very low at the time. The original article connected that weak price environment and the apparent euro overvaluation with the contemporary case for more accommodative European Central Bank policy, including quantitative easing.
That was a period-specific policy interpretation rather than a timeless signal. Exchange rates, product prices and central-bank frameworks all change. A modern assessment would need current data across a much broader basket of goods and services.
How to read a single-product index
A compact index is best understood as a conversation starter, not a complete currency valuation model. Product-specific pricing decisions can influence the result, while consumption patterns and non-traded services are absent. Comparisons may also change depending on whether sales tax is included and which exchange rate date is selected.
Its value is explanatory: it makes an abstract idea visible and encourages readers to ask why an identical product has different converted prices. Its limitation is equally important: one device cannot describe the purchasing power of an entire economy.
Editorial note: This archive edition paraphrases and contextualises the historical argument. It does not provide personalised financial or investment advice.