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?
- (a) 1 only ✓ UPSC's answer
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Why the answer is (a)
• Statement 1 is correct: PPP exchange rates equalise the price of an identical basket of goods and services across countries, as compiled by the World Bank's International Comparison Program.
• Statement 2 is wrong: in PPP terms India is the third-largest economy after China and the USA; it is around sixth/fifth in nominal (market exchange rate) terms.
• PPP corrects for the fact that non-traded goods and services are cheaper in poorer countries.
• Hence 1 only, option (a).
Why the other options are wrong
- (b) 2 only
- Statement 2 is wrong: India is third in PPP terms.
- (c) Both 1 and 2
- Statement 2 is wrong.
- (d) Neither 1 nor 2
- Statement 1 is correct: PPP compares identical baskets.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2019, held on 2 June 2019. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.