Passage: How is deflation done? Most countries use a method called 'double deflation', where input and output prices are deflated separately. Consider a manufacturer importing oil for use in production. If oil prices fall, output prices do not and quantities remain the same, real value added should not change. But if the same deflator is used for inputs and outputs, as in India, it would look as if the manufacturer had become more productive.

Which of the following statements is/are correct?
1. Real value should not change in the instance of static output cost and unchanged quantities against falling oil prices.
2. Deflators are to be used separately for inputs and outputs, and this is a practice universally adopted by all economies.

Question

Passage: How is deflation done? Most countries use a method called 'double deflation', where input and output prices are deflated separately. Consider a manufacturer importing oil for use in production. If oil prices fall, output prices do not and quantities remain the same, real value added should not change. But if the same deflator is used for inputs and outputs, as in India, it would look as if the manufacturer had become more productive.

Which of the following statements is/are correct?
1. Real value should not change in the instance of static output cost and unchanged quantities against falling oil prices.
2. Deflators are to be used separately for inputs and outputs, and this is a practice universally adopted by all economies.

Accepted Answer

1 only. Statement 1 is directly supported by the passage: 'If oil prices fall, output prices do not and quantities remain the same, real value added should not change.' Statement 2 is incorrect because the passage says 'Most countries use... double deflation', not all economies; further, India uses a single deflator. Hence only 1 is correct.

Explanation

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