Q. Consider the following statements : - Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries.
- In terms of PPP dollars, India is the sixth largest economy in the world.
Which of the statements given above is/are correct? (UPSC Prelims 2019)
Answer:
1 only
Notes: The correct answer is
[A] 1 only. Purchasing Power Parity (PPP) is an economic theory that allows for the comparison of the purchasing power of various world currencies.
- Statement 1 (Correct): PPP exchange rates are indeed calculated by comparing the prices of a standardized basket of goods and services (such as food, clothing, and rent) across different countries. This method accounts for the differences in the cost of living and inflation rates, providing a more accurate comparison of real output than market exchange rates.
- Statement 2 (Incorrect): In terms of GDP (PPP), India is the third-largest economy in the world, trailing only China and the United States. While India is the fifth or sixth largest economy in terms of Nominal GDP (market exchange rates), the lower cost of goods and services in India significantly boosts its ranking when measured by PPP.
The International Comparison Program (ICP), hosted by the World Bank, is the primary body responsible for collecting the price data used to calculate these PPPs globally.