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.

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.

QUESTION

CSAT

Hard

Comprehension

Prelims 2026

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.

Select an option to attempt

Explanation

Statement 1 is valid. In economic accounting, the choice of deflation strategy (such as single deflation versus double deflation) can significantly impact the calculated real value added. For instance, if input prices fall sharply and a single deflator is used instead of separate ones, the real value added might be overestimated, making manufacturers appear to be performing better than they actually are.

Statement 2 is invalid. Double deflation is a method where gross output and intermediate inputs are deflated separately using their own distinct price indices (an output price index for output and an input price index for inputs). Deflating both against a single price index is contrary to the concept of double deflation.

Therefore, only assumption 1 is valid.