Passage How is deflation done? Most countries use a method called 'double deflation', where input and output prices are deflated…

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.

Select the answer using the code given below.

1. A. 1 only (Correct answer)
2. B. 2 only
3. C. Both 1 and 2
4. D. Neither 1 nor 2

Correct Answer

Option A — 1 only

Detailed Solution & Explanation

The correct answer is Option A (1 only).

Key Points

• 1 — the passage states that when output prices and quantities stay the same while oil (input) prices fall, real value added should not change, so statement 1 is correct.
• 2 is wrong — the passage says using the *same* deflator "as in India" is exactly what distorts the picture, so separate deflators are not a practice universally adopted by all economies.

Additional Information

• Only statement 1 matches the passage, giving Option A.