Chinese Big Macs
At 14.5 yuan or $2.18, a Beijing Big Mac is cheap. In the U.S. the price is closer to $3.71. As explained by The Economist, we just need to know about the Big Mac to know what the yuan should really buy. Dividing $3.71 (a US Mac) by 14.5 yuan (Chinese Macs) means that 1 yuan should equal 26 cents.
But…in foreign exchange markets, 1 yuan equals 15 cents.
The Economic Lesson
How does money become more or less expensive? In foreign exchange markets, basically, it is all about demand and supply. For example, buyers tend to want more goods and services when a currency is cheap and less when it costs more. Correspondingly, if supply changes, it too affects a currency’s value.
For the Chinese though, rather than the market, the value of their currency also responds to a supply that they control. For a more specific explanation, you can look here.