Consider the following statements : 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?

The correct answer is A (1 only). Statement I is true and Statement II is false.

• Statement I is correct. PPP exchange rates are derived by pricing the same basket of goods and services in different countries and finding the rate at which the currencies buy equal amounts. The idea rests on the law of one price, adjusted for the fact that prices of tradables and non-tradables differ across countries.
• Statement II is wrong. In PPP terms India was the third-largest economy in 2019, behind China and the US, according to IMF and World Bank ICP-based estimates. Sixth place is a market-exchange-rate kind of rank, not a PPP one. Rankings get revised as data is updated, but India has remained among the top three in PPP terms in recent IMF estimates.

The core concept is the difference between nominal exchange rates and PPP-based comparison. PPP gives a truer picture of living standards and real output, which is why it matters for the Mains paper on Indian economy and for debates on growth and per capita income.

Trap: Aspirants mix up market exchange rate rankings (where India was around sixth or seventh in 2019) with PPP rankings and mark Statement II as correct.