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Indian Economy - Understanding the basics of Indian economic system

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Consider the following statements

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?

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UPSC CSP Previous Year Paper (2019)

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1 only

2 only

Both 1 and 2

Neither 1 nor 2

Explanation:

Purchasing Power Parity is a way of measuring economic variables in different countries so that irrelevant exchange rate variations do not distort comparisons.
It states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.
This means that the exchange rate between two countries should equal the ratio of the two countries’ price level of a fixed basket of goods and services.
Therefore, statement 1 is correct.
On the PPP basis, China is the world’s largest economy in 2018, followed by United States at 2^nd and India at 3^rd position.

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