CA Foundation · Quantitative Aptitude · Index Numbers
Which of the following is the main purpose of deflating a time series of nominal income using a price index?
Deflating converts nominal or money values into real values at constant base-year prices. It divides the money figure by the price index divided by 100, which removes the effect of price changes so that income or sales in different years can be compared fairly.
- ATo convert the series into real income at constant pricesCorrect
- BTo convert the series into a quantity index
- CTo raise all values to the current year price level
- DTo change the base year of the price index
Explanation
Deflating divides money values by the price index (expressed as a ratio to 100). This removes the effect of price changes and gives real income, that is, income at base-year prices. Raising values to current prices or changing the base are different operations.
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