Question map
Not attempted Correct Incorrect ★ Bookmarked
Loading…
Q82 (IAS/2019) Economy › Basic Concepts & National Income › Purchasing power parity Official Key

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?

Result
Your answer: —  ·  Correct: A
Explanation

The correct answer is option A (1 only).

**Statement 1 is correct:** PPP exchange rates are calculated by considering the same basket of commodities produced in both countries and comparing their prices[1]. As per IMF, "The purchasing power parity between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country's currency will purchase the same volume of goods and services in the second country as it does in the first."[2]

**Statement 2 is incorrect:** India's ranking in terms of PPP GDP is not sixth. Sustained high growth over the last four years has made India the third largest economy after USA and China (measured in PPP terms)[3], while another source indicates in terms of purchasing power parity (PPP) GDP, India is the fourth largest economy after the US, China and Japan[4]. Therefore, India ranks either third or fourth in PPP terms, not sixth.

Sources
  1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 2. Purchasing Power Parity (PPP) Exchange Rate > p. 24
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 2. Purchasing Power Parity (PPP) Exchange Rate > p. 25
  3. [3] http://dea.gov.in/files/mid_year_review_documents/MYREnglish07.pdf
  4. [4] https://www.wto.org/english/tratop_e/tpr_e/g182_e.doc
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
64%
got it right
PROVENANCE & STUDY PATTERN
Full view
Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. Consider the following statements : 1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same b…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10

This is a classic 'Metric Swap' trap. Statement 1 is a static definition found in every macroeconomics textbook. Statement 2 tests if you can distinguish between India's 'Nominal' rank (fluctuating 5th-7th) and 'PPP' rank (solidly 3rd). The strategy is to memorize the Top 3 countries for both Nominal and PPP GDP.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Are Purchasing Power Parity (PPP) exchange rates calculated by comparing the prices of the same basket of goods and services across different countries?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 2. Purchasing Power Parity (PPP) Exchange Rate > p. 24
Presence: 5/5
“Above example was a case of just one product. But, if both the countries are producing several commodities then to calculate PPP exchange rate, consider the same basket of commodities which are produced in both the countries and compare the prices, whatever we will get that will be PPP exchange rate. For example, consider the following: Suppose the price of the basket of commodities in India is Rs 2000 and the price of the same basket of commodities in US is $100. This means that purchasing power of Rs. 2000 in India is same as purchasing power of $100 in US.”
Why this source?
  • Explicitly instructs using the same basket of commodities produced in both countries and comparing their prices to obtain the PPP exchange rate.
  • Gives a numerical example (Rs 2000 vs $100) showing equivalence of purchasing power via basket comparison.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 2. Purchasing Power Parity (PPP) Exchange Rate > p. 25
Presence: 5/5
“If the inflation rate is different in both the countries then PPP exchange rate will change with time. But if both countries have same rate of inflation or zero inflation then PPP exchange rates will remain constant. When Nominal Exchange Rate becomes equal to PPP exchange rate, we say that the currencies of the two countries are at purchasing power parity. As per IMF "The purchasing power parity between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country's currency will purchase the same volume of goods and services in the second country as it does in the first."”
Why this source?
  • Provides an authoritative definition that PPP is the rate ensuring a given amount of currency buys the same volume of goods and services in both countries.
  • Notes that PPP changes with differing inflation rates, linking PPP to relative price levels across countries.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > 1.18Indian Economy > p. 18
Presence: 4/5
“• Expenditure method total outlay method GDP<sub>MP</sub> = C + I + G + X M. • Capital-Output ratio: amount of capital required to produce 1 unit of output; low capital-output ratio is always desired. • Purchasing Power Parity compares economic productivity and standards of living between countries - compares different countries' currencies through 'basket of goods' approach.”
Why this source?
  • States PPP compares currencies through a 'basket of goods' approach to assess productivity and standards of living between countries.
  • Frames PPP as a comparative price-level method rather than a market exchange rate calculation.
Statement 2
Is India the sixth-largest economy in the world by GDP measured in purchasing power parity (PPP) dollars?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 4/5
"Sustained high growth over the last four years has made India the third largest economy after USA and China (measured in PPP terms)"
Why this source?
  • Explicitly states India's PPP ranking as third largest, which contradicts the claim that it is sixth.
  • Provides a PPP-based ranking (third) rather than sixth, showing different authoritative counts exist.
Web source
Presence: 4/5
"In terms of purchasing power parity (PPP) GDP, India is the fourth largest economy after the US, China and Japan."
Why this source?
  • Gives a PPP ranking of India as the fourth largest economy, again contradicting the 'sixth' claim.
  • Uses PPP explicitly, directly relevant to the statement's measurement basis.
Web source
Presence: 4/5
"In 2014, India was ranked as the tenth-largest economy in the world. In under a decade, India surpassed the UK to reach the fourth position."
Why this source?
  • Provides time-based PPP/size rankings showing India was tenth in 2014 and later rose to fourth, indicating it is not sixth in these cited accounts.
  • Demonstrates variability over time but does not support the 'sixth' rank.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 8: Inclusive growth and issues > 8.13 Rising Income Inequality > p. 275
Strength: 5/5
“Spectacular economic growth over the past three decades has made India a global economic powerhouse. Between 1990 and 2019, India's economy grew at a rate of around 7% at constant prices, making it a $2.9 Trillion economy. The Indian economy is now the third largest in the world by purchasing power parity after China and the United States. The surging economic growth has improved living conditions of its citizens, but these improvements were not uniformly distributed among India's diverse population. Despite being among the richest countries in the world, India has attracted negative attention in recent years as the second most unequal country in the world, after Russia.”
Why relevant

Explicitly states a PPP-based world ranking for India (saying India is the third largest by PPP after China and the United States).

How to extend

A student could compare this book's claim with IMF/WEO or World Bank PPP GDP tables (common external sources) to see if India's PPP rank is 3rd, 6th, or changed over time.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > Fundamentals of Macro Economy > p. 35
Strength: 4/5
“• 8. Consider the following statements [2019] • (i) Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries• (ii) In terms of PPP dollars, India is the sixth largest economy in the world Which of the statements given above is / are correct? • (a) (i) only• (b) (i) & (ii) only• (c) Both (i) & (ii)• (d) Neither (i) nor (ii)• 9. Consider the following statements: [2020] 1. The weight age of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).”
Why relevant

Presents a UPSC-style question item that lists the proposition 'In terms of PPP dollars, India is the sixth largest economy' as a claim to be judged.

How to extend

This shows the claim has been circulated as a testable assertion — a student could look up year-specific PPP rankings (e.g., for 2019) in IMF/WEO to verify which rank was current then.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 2. Purchasing Power Parity (PPP) Exchange Rate > p. 24
Strength: 4/5
“Above example was a case of just one product. But, if both the countries are producing several commodities then to calculate PPP exchange rate, consider the same basket of commodities which are produced in both the countries and compare the prices, whatever we will get that will be PPP exchange rate. For example, consider the following: Suppose the price of the basket of commodities in India is Rs 2000 and the price of the same basket of commodities in US is $100. This means that purchasing power of Rs. 2000 in India is same as purchasing power of $100 in US.”
Why relevant

Gives the basic definition/measurement method of PPP — comparing prices of the same basket of goods to compute PPP exchange rates.

How to extend

Knowing how PPP is constructed, a student can understand why PPP GDP rankings differ from nominal-dollar rankings and thus why checking PPP-based tables (not nominal GDP lists) is necessary.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 2. Purchasing Power Parity (PPP) Exchange Rate > p. 25
Strength: 4/5
“If the inflation rate is different in both the countries then PPP exchange rate will change with time. But if both countries have same rate of inflation or zero inflation then PPP exchange rates will remain constant. When Nominal Exchange Rate becomes equal to PPP exchange rate, we say that the currencies of the two countries are at purchasing power parity. As per IMF "The purchasing power parity between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country's currency will purchase the same volume of goods and services in the second country as it does in the first."”
Why relevant

States the IMF definition of purchasing power parity and notes PPP exchange rates can change with differing inflation — clarifying the concept behind PPP GDP comparisons.

How to extend

A student could use this to appreciate that PPP GDP rankings depend on price level adjustments and should consult time-stamped PPP GDP data (IMF/WEO) for an accurate rank at a given year.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.17 World Bank & IMF Classification of Countries > p. 30
Strength: 3/5
“High Income $13,205 < GNI per capita Upper Middle $4,255 < GNI per capita < $13,205 Middle Income Lower Middle $1,085< GNI per capita < $4,255 Low Income GNI per capita < $1,085 India belongs to the "Lower Middle" group as its GNI per capita is $2500 (Rs. 2.10 lakhs) in terms of nominal exchange rate. As per the PPP exchange rate, India's GNI per capita is approx. $9000. The World Economic Outlook (WEO, IMF) classifies the world into two major groups: • Advanced economies• Emerging market and developing economies This above classification is based on three parameters: • Per capita income (using PPP exchange rate)• Export diversification• Degree of integration into the global financial system”
Why relevant

Shows PPP is used for per-capita comparisons and country classifications, indicating authoritative institutions (WEO/IMF) rely on PPP-based measures for international ranking/context.

How to extend

A student can infer that the same institutional sources that use PPP for classification also publish PPP GDP aggregates; checking those sources will show India's PPP GDP rank.

Pattern takeaway: UPSC frequently creates incorrect statements by taking a valid fact (India is the 6th largest economy... in Nominal terms) and attaching the wrong prefix (...in PPP terms). Always audit the 'Unit of Measurement' in ranking statements.
How you should have studied
  1. [THE VERDICT]: Sitter with a Trap. Statement 1 is basic NCERT/Vivek Singh. Statement 2 is a 'Data Swap' error (Nominal rank used for PPP).
  2. [THE CONCEPTUAL TRIGGER]: National Income Accounting > International Comparison of Economies (Nominal vs PPP).
  3. [THE HORIZONTAL EXPANSION]: Memorize this grid: 1. Top 3 PPP: China > USA > India. 2. Top 3 Nominal: USA > China > Germany/Japan. 3. India's Share in Global GDP: ~3.5% (Nominal) vs ~7.2% (PPP). 4. Agency: World Bank's International Comparison Program (ICP) releases PPP data.
  4. [THE STRATEGIC METACOGNITION]: When the Economic Survey or Budget mentions India's global standing, create a binary note: 'Rank by Market Exchange Rate' vs 'Rank by Purchasing Power'. UPSC loves swapping these two columns.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Basket-of-goods method for PPP
💡 The insight

PPP is constructed by comparing the prices of a common basket of goods and services across countries to equate purchasing power.

High-yield for questions on exchange rate concepts and international comparisons; links to national income measurement and standards of living debates. Mastery lets aspirants explain PPP-based GDP conversions and critique cross-country comparisons in essays and prelims/mains answers.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 2. Purchasing Power Parity (PPP) Exchange Rate > p. 24
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > 1.18Indian Economy > p. 18
🔗 Anchor: "Are Purchasing Power Parity (PPP) exchange rates calculated by comparing the pri..."
📌 Adjacent topic to master
S1
👉 Inflation differentials and PPP dynamics
💡 The insight

Differences in inflation rates across countries cause PPP exchange rates to change over time.

Essential for understanding long-run exchange-rate adjustments and policy implications; connects PPP theory to exchange-rate predictions, competitiveness, and macroeconomic policy questions. Enables answering scenario questions about how inflation alters relative prices and PPP.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 2. Purchasing Power Parity (PPP) Exchange Rate > p. 25
🔗 Anchor: "Are Purchasing Power Parity (PPP) exchange rates calculated by comparing the pri..."
📌 Adjacent topic to master
S1
👉 Practical PPP measures (e.g., Big Mac Index)
💡 The insight

Practical indices compare identical consumer items across countries to generate PPP estimates.

Useful quick-reference tools in answers to illustrate PPP concepts and limitations; helps critique measurement methods and link theory to empirical proxies used in economics journalism and reports.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > HISTORY OF EXCHANGE RATE SYSTEM IN INDIA > p. 497
🔗 Anchor: "Are Purchasing Power Parity (PPP) exchange rates calculated by comparing the pri..."
📌 Adjacent topic to master
S2
👉 Purchasing Power Parity (PPP) exchange rate
💡 The insight

PPP exchange rate is the method for equating purchasing power of currencies by comparing prices of the same basket of goods and services and underlies GDP measured in PPP dollars.

High-yield for macroeconomy questions: explains how international GDP comparisons are constructed and why PPP-based figures differ from nominal figures; connects to topics on price level comparisons, inflation impacts, and international living standards. Enables answering questions about why rankings change when using PPP vs nominal exchange rates.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 2. Purchasing Power Parity (PPP) Exchange Rate > p. 24
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 2. Purchasing Power Parity (PPP) Exchange Rate > p. 25
🔗 Anchor: "Is India the sixth-largest economy in the world by GDP measured in purchasing po..."
📌 Adjacent topic to master
S2
👉 Use of PPP for income classification and per-capita comparisons
💡 The insight

PPP-adjusted per-capita income is used in international classification and affects how a country's living standard and rank are reported.

Important for questions on World Bank/IMF classification, development comparisons, and policy implications of income measures; helps link macro indicators with development categories and to critique headline rankings in exam answers.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.17 World Bank & IMF Classification of Countries > p. 30
🔗 Anchor: "Is India the sixth-largest economy in the world by GDP measured in purchasing po..."
📌 Adjacent topic to master
S2
👉 Real exchange rate and its relation to PPP (REER/NEER context)
💡 The insight

Real exchange rate concepts show when nominal exchange rates equal PPP and how competitiveness metrics (REER/NEER) relate to PPP adjustments.

Useful for questions on external competitiveness, currency valuation, and trade policy; mastering this aids in analyzing how exchange rate movements alter PPP comparisons and affect GDP valuation across countries.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 3. Real Exchange Rate (RER) > p. 27
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > 6.2.4 Managed Floating > p. 96
🔗 Anchor: "Is India the sixth-largest economy in the world by GDP measured in purchasing po..."
🌑 The Hidden Trap

The International Comparison Program (ICP) under the World Bank is the actual authority that calculates these PPP parities. A future question might ask: 'Who releases the PPP data used for global rankings?' Answer: World Bank (ICP).

⚡ Elimination Cheat Code

The 'Badge of Honor' Logic: The Indian government frequently boasts about being the '3rd largest economy' in PPP terms in speeches. If you recall this common bragging point, '6th' immediately feels wrong. Also, specific ranks (like 6th) in static statements are usually swapped with the rank from a parallel list (Nominal GDP).

🔗 Mains Connection

Link to GS-3 (Inclusive Growth): While India is 3rd in total PPP GDP (size of economy), it ranks very low (~120s) in 'Per Capita' PPP. This huge gap highlights income inequality and the population denominator effect—a perfect intro for Mains answers on development.

✓ Thank you! We'll review this.

SIMILAR QUESTIONS

IAS · 2020 · Q37 Relevance score: -0.09

Consider the following statements : 1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). 2. The WPI does not capture changes in the prices of services, which CPI does. 3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates. Which of the statements given above is/are correct ?

CDS-I · 2024 · Q102 Relevance score: -0.46

Which of the following statements is/are correct? 1. A price index captures the change in the average price of a constant basket of commodities. 2. If the price index takes values 100, 110 and 121 in three consecutive years respectively, then the inflation rates in the 2nd and 3rd years are 10% and 21% respectively. Select the correct answer using the code given below.

IAS · 2012 · Q4 Relevance score: -0.76

Consider the following statements : The price of any currency in international market is decided by the 1. World Bank 2. Demand for goods/services provided by the country concerned 3. Stability of the government of the concerned country 4. Economic potential of the country in question Which of the statements given above are correct ?

IAS · 2005 · Q95 Relevance score: -1.11

Consider the following statements: 1. During the year 2004, India’s foreign exchange reserves did not exceed the 125 billion U.S. dollar mark. 2. The Series of index numbers of wholesale prices introduced from April, 2000 has the year 1993-94 as base year. Which of the statements is/are correct?

IAS · 1998 · Q16 Relevance score: -1.22

Consider the following statements : The price of any currency in international market is decided by the I. World Bank. II. demand for goods/services provided by the country concerned. III. stability of the government of the concerned country. IV. economic potential of the country in question. Of these statements :