text: This value is then compared with the actual exchange rate ; if it is lower , then the first currency is under-valued ( according to PPP theory ) compared with the second , and conversely , if it is higher , then the first currency is over-valued .
simplified: If the rate is lower , then the first currency is under-valued ( according to purchasing power parity ( PPP ) theory ) compared with the second currency . Conversely , if the rate is higher , then the first currency is over-valued .