Short Definition

In ideally markets, identical goods should have the same price. The exchange rate should equalize the price of goods across countries. If goods differ significantly, then the low priced good can be sold in the high priced market for an immediate profit.

WikiWealth uses this analysis to give an indication of the reasonable price for a currency by showing the expected return for a currency if prices equalize immediately.

Long Definition

Sources:

http://en.wikipedia.org/wiki/Purchasing_power_parity
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29