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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 assumptions is/are valid?
- Deflation strategies can be used to make manufacturers appear to be doing better than they actually are.
- When input and output prices are both deflated against a single input price, it is referred to as 'double deflation'.
Select the answer using the code given below.
Explanation
Option 1 is correct because the passage indicates that using a single deflator can mistakenly suggest improved productivity in manufacturing when, in reality, the underlying value added has not changed. Option 2 is incorrect as 'double deflation' refers to using separate deflators for inputs and outputs, not a single input price.
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