Based on the 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.

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Question

Based on the 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.

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Accepted Answer

Correct Option: (a) 1 only Let's evaluate the statements based on the passage on deflation: 1. Real value should not change in the instance of static output cost and unchanged quantities against falling oil prices. The passage states: 'If oil prices fall, output prices do not and quantities remain the same, real value added should not change.' This matches statement 1 perfectly. Hence statement 1 is correct. 2. Deflators are to be used separately for inputs and outputs, and this is a practice universally adopted by all economies. The passage states 'Most countries use a method called 'double deflation'... as in India, it would look as if...', which implies most countries use it, but does not state it is 'universally adopted by all economies' (some countries like India use single deflation). Hence statement 2 is incorrect due to the word 'universally'. Therefore, only statement 1 is correct.

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