UPSC Prelims 2019 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 statements given above is/are correct?

Explanation:

• The Purchase Power Parity (PPP) exchange rate is the rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country.
  
  
• It is used to calculate the correct/real value of a currency which may be different from the market exchange rate of the currency. The real value of currencies is required to compare the various economies. Because each country reports its data in its own currency, to compare the data, each country’s statistics must be converted into a common currency. For the calculation of the PPP, a comparable basket of goods and services selected of identical qualities and quantities. PPP exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries. So, statement 1 is correct.
  
  
• This is the most commonly used data in comparative economics. The GDPs of the member nations are ranked by the IMF at purchasing power parity (PPP). India’s GDP is today 3rd largest in the world at the PPP exchange rate (after China and the USA). So, statement 2 is not correct.
  
  

Therefore, option (1) is the correct answer.

Subject: Economics | National Income Accounting