Differentiate between national income at current price and national income at constant prices Which of the two presents a better view of the ecomic growth of economy and why?
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Difference between National Income at Current Price and Constant Price
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Difference between National Income at Current Price and Constant Price!
National Income at Current Price:
It is the money value of final goods and services produced by normal residents of a country in a year, measured at the prices of the current year. For example, measurement of India’s National Income of 2013-2014 at the prices of 2013-2014.
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i. It is also known as ‘Nominal National Income’.
ii. It does not show the true picture of economic growth of a country as any increase in nominal national income may be due to rise in price level without any change in physical output.
So, in order to eliminate the effect of price changes, national income is also estimated at a constant price.
National Income at Constant Price:
It is the money value of final goods and services produced by normal residents of a country in a year, measured at base year price. Base Year is a normal year which is free from price fluctuations. Presently 2004-2005 is taken as the base year in India. If we measure India’s National Income of 2013-2014 at the prices of 2004-2005, then it is termed as ‘National Income at constant price’.
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i. It is also known as ‘Real National Income’.
ii. It shows the true picture of economic growth of a country as any increase in real national income is due to increase in output only.
The National Statistical Commission (NSC), has suggested to revise the base year to 2011-12 from the current base year of 2004-05 for the calculation of new Gross Domestic Product (GDP) of the country.
Answer:
National income measured at constant prices truly reflects the real change in the physical output of a country whereas national income at current prices does not. It is useful In finding out the real development capacity of the economy.
Explanation:
Real gross domestic product (real GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year (expressed in base-year prices). and is often referred to as "constant-price," "inflation-corrected", or "constant dollar" GDP.
Nominal national income is calculated on the basis of current year prices whereas the real national income is calculated on the base year prices.
Current prices make no adjustment for inflation. Constant prices adjust for the effects of inflation. Using constant prices enables us to measure the actual change in output (and not just an increase due to the effects of inflation.
A real interest rate is adjusted to remove the effects of inflation and gives the real rate of a bond or loan. A nominal interest rate refers to the interest rate before taking inflation into account.