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?

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2

Explanation

Statement 1 is correct

• Purchasing Power Parity (PPP) exchange rates are calculated by comparing the cost of a specific basket of goods and services across different countries. For example, if a fast-food meal costs $5 in the U.S. but ₹100 in India, the PPP exchange rate would be ₹20 per dollar, indicating that ₹20 in India can purchase what $1 can in the U.S. This method accounts for differences in living costs and gives a better comparison of the real value of currencies and their purchasing power.

Statement 2 is incorrect

• India is the world’s third largest economy in terms of GDP by PPP calculations.

Answer: (a) 1 only; Difficulty Level: Medium