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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
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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
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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.
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