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 assumptions is/are valid?

1. Deflation strategies can be used to make manufacturers appear to be doing better than they actually are.

2. 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.

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 explains that using a single deflator makes a manufacturer "look as if" it had become more productive, so deflation strategies can make manufacturers appear to be doing better than they are → valid.
• 2 is wrong — deflating inputs and outputs against a single input price is the *flawed single* approach; double deflation is precisely when input and output prices are deflated separately.

Additional Information

• Statement 2 inverts the definition of double deflation, so only 1 is valid → Option A.