22.40        ndian     onom
          (i) One could confess and agree to testify        price-cutting, firstly the rivals are ousted from the
              against the other as a state witness,         market and later the consumers are exploited as
              receiving a light sentence while his fellow   monopolistic suppliers by the firm.
              prisoner receives a heavy sentence.
         (ii) They can both say nothing and may turn           ppp
              out to be lucky getting light sentences or
                                                            Purchasing power parity (PPP) is a method of
              even be let off due to lack of firm evidence.
                                                            calculating the correct/real value of a currency
        (iii) They may both confess and get lighter         which may be different from the market exchange
              individual sentences than one would           rate of the currency. Using this method economies
              have received had he said nothing and the
                                                            may be studied comparatively in a common
              other had testified against him.
                                                            currency. This is a very popular method handy
          The second outcome looks the best for both        for the IMF and WB (introduced by them in
     the prisoners. However, the risk that the other        1990) in studying the living standards of people
     might confess and turn state witness is likely to      in different economies. The PPP gives a different
     encourage both to confess, landing both with           exchange rate for a currency which may be made
     sentences that they might have avoided had they        the basis for measuring the national income of
     been able to co-operate by remaining silent.           the economies. It is on this basis that the value of
          In reality, firms behave like these prisoners,    gross national product (GNP) of India becomes
     not setting prices as high as they could do if they    the fourth largest in the world (after the US,
     only trusted the other firms not to undercut them.     Japan, and China) though on the basis of market
     Ultimately, the firms are worse off i.e. all firms     exchange rate of rupee, it stands at the thirteenth
     suffer.                                                rank.
                                                                 The concept of the PPP was developed by the
        populAtion trAp                                     great European conservative economist, Gustav
     A situation of population growth rate greater          Cassel (1866–1944), belonging to Sweden. This
     than the achievable economic growth rate. This         concept works on the assumption that markets
     makes it difficult to alleviate poverty;–government    work on the law of one price, i.e., identical goods
     is suggested to implement population control           and services (in quantity as well as quality) must
     measures.                                              have the same price in different markets when
                                                            measured in a common currency. If this is not the
        poverty trAp                                        case it means that the purchasing power of the two
                                                            currencies is different.
     A situation where an unemployed getting
                                                                 Let us look at an example. Suppose that sugar is
     unemployment allowance is not encouraged to
                                                            selling $1 in US and Rs. 20 in India a kilo then the
     seek work/employment because his/her after-tax
                                                            PPP-based exchange rate of rupee will be $1 = Rs.
     earnings as employed is less than the benefits as
                                                            20. This is the way how The Economist of London
     unemployed, also known as the unemployment
                                                            has prepared its ‘Big Mac Index’ (comparing the
     trap.
                                                            Mc Donald’s Big Mac burger prices in different
                                                            economies).
        preDAtory pricing
                                                                 In theory, the value of currencies in terms of
     The pricing policy of a firm with the express purpose  their market exchange rate should converge with
     of harming rivals or exploiting the consumer. By       their value in terms of the PPP in the long run.