Consider the following statements: 1. Purchasing Power Parity (PPP)

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?

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1 only

2 only

Both 1 and 2

Neither 1 nor 2

Answer is Right!

Answer is Wrong!

This question was previously asked in

UPSC IAS – 2019

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The correct answer is A, as statement 1 is correct while statement 2 is incorrect.

Statement 1 is correct. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of a common basket of goods and services in different countries. The idea is to determine how much currency ‘A’ is needed in country ‘A’ to buy the same basket of goods that currency ‘B’ buys in country ‘B’. The 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.
Statement 2 is incorrect. In terms of PPP dollars, India is the third largest economy in the world, after China and the United States. This ranking has been consistent in data provided by international bodies like the International Monetary Fund (IMF) and the World Bank in recent years.

PPP is considered a more accurate measure of comparing living standards and the size of economies across countries than using nominal GDP converted at market exchange rates, because it accounts for differences in the cost of living. Market exchange rates can be volatile and influenced by financial flows, whereas PPP rates reflect the actual purchasing power of a currency within its domestic economy.

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