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2026
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?
- Real value should not change in the instance of static output cost and unchanged quantities against falling oil prices.
- Deflators are to be used separately for inputs and outputs, and this is a practice universally adopted by all economies.
Select the answer using the code given below.
Explanation
Statement 1 is correct as real value should indeed remain unchanged in the given scenario. However, Statement 2 is incorrect because not all economies universally adopt the practice of using separate deflators for inputs and outputs; India is cited as an example of using a single deflator. Thus, the option "Neither 1 nor 2" is not appropriately selected; it should reflect that only Statement 2 is incorrect while Statement 1 is correct.
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