UPSC Prelims 2019 Q82: Indian Economy – National Income & Economic Growth
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?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (a) 1 only
Explanation
Purchasing Power Parity (PPP) & India's Global Rank
| Statement | Claim | Verdict | Detail |
|---|---|---|---|
| 1 | PPP exchange rate = comparing prices of same basket in different countries | TRUE | PPP = ratio at which the same basket of goods costs the same in two countries' currencies. Underpins The Economist's Big Mac Index and IMF/World Bank PPP GDP figures. |
| 2 | In PPP terms, India is the 6th largest economy | FALSE | In PPP terms, India is the 3rd largest economy in the world (after China and USA). India is around 5th in nominal GDP terms (not 6th in PPP). |
Only statement 1 is correct. Answer: (a) 1 only.
Answer: (a) 1 only.
Why each option is right or wrong
- (a) CORRECT. PPP does compare same basket prices (S1 right), but India is the 3rd largest PPP economy, NOT 6th (S2 wrong).
- (b) Incorrect. Statement 2 is wrong - India is 3rd in PPP terms.
- (c) Incorrect. Statement 2 is factually wrong.
- (d) Incorrect. Statement 1 is correct.
Key point
PPP = same basket priced in two currencies. India = 3rd largest PPP economy (after China, USA). Nominal GDP rank ~5th.
Remember
Only statement 1 is correct. PPP exchange rates ARE calculated by comparing prices of the same basket of goods and services in different countries. But in PPP terms, India is the 3rd largest economy in the world (after China and USA) - NOT the 6th largest.
Common mistakes
- Confusing PPP rank (3rd) with nominal rank (5th).
- Assuming smaller economies rank higher in PPP - India is 3rd due to huge population + cost-of-living arbitrage.
- Not knowing PPP inflates emerging market GDPs relative to nominal terms.
Exam tip
PPP top-3: China > USA > India. Nominal top-5: USA > China > Germany > Japan > India. India's PPP GDP ~US$14 trillion; nominal ~US$3.7 trillion (recent). PPP is preferred for comparing living standards.
Sources
- IMF World Economic Outlook Database - PPP GDP rankings
- World Bank - International Comparison Program (ICP) data