Question 26 from UPSC CSE 2019 - Economics

Question

Consider the following statements:
1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries.
2. In terms of PPP dollars, India is the sixth largest economy in the world.
Which of the statement given above is/are correct?

Accepted Answer

Correct Option: A. 1 only

Strategy: Focus on the primary process underlying PPP: it compares the prices of a standardized basket of goods and services in different nations, thus standardizing purchasing power for comparison. Statement 1 matches this process precisely. For Statement 2, up-to-date global economic analysis and World Bank/IMF data confirm that India ranks higher than sixth—in fact, it is third in the world on a PPP basis. This directly invalidates Statement 2.

Key Info: Purchasing Power Parity (PPP) is an international economic metric used to compare the relative value of currencies by assessing the price of an identical basket of goods and services across different countries. This method adjusts for price level differences, thereby facilitating more accurate cross-country comparisons of economic productivity and living standards. The calculation is typically undertaken by organizations such as the World Bank and the International Monetary Fund (IMF), and the resultant PPP exchange rates are used to convert national GDP figures into 'international dollars.' As of the most recent global economic assessments, China is the largest economy at PPP, followed by the United States. India, owing to its large population and economic output, is ranked third globally on a PPP basis—not sixth. Major international comparisons using PPP can significantly alter global economic rankings compared to nominal GDP calculations, which rely on market exchange rates.

Answer

Option B: 2 only

Answer

Option C: Both 1 and 2

Answer

Option D: Neither 1 nor 2