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? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
Answer: (a)
The basis for Purchasing Power Parity (PPP) is the “law of one price”.
Statement 1 is correct: PPPs measure the total amount of goods and services that a single unit of a country’s currency can buy in another country. The PPP between countries A and B measures the amount of country A’s currency required to purchase a basket of goods and services in country A as compared to the amount of country B’s currency to purchase a similar basket of goods and services in country B.
Statement 2 is not correct: In terms of PPP dollars, India is the third largest economy in the world. (Fourth largest if the European Union is also considered as a common economic space for ranking purposes).
