National Income at Current Price and Constant Price

National Income at Current Price

National Income at Current Price is the monetary value of the finished goods and services produced by normal residents of a nation in a year, calculated at the current year’s prices. For example, consider calculating India’s National Income for 2020-21 at 2020-21 prices. It is often referred to as Nominal National Income and does not accurately reflect the economic growth of the country because any increase in nominal national income may be due to a rise in the price level without any change in physical output. Therefore, to eliminate the impact of price changes, national income is also calculated at a constant price.

National Income at Constant Price

National Income at Constant Price is the monetary value of the finished goods and services that normal country residents produce in a year when calculated at base year prices. A base year is a regular year that is free from price variations. In India, 2011–2012 is now used as the base year. For example, India’s national income in 2020–21 will be referred to as its National Income at Constant Price, if it is calculated using the prices in 2011–2012. 

It is also referred to as Real National Income as it shows the actual picture of a country’s economic growth because any rise in real national income is only due to an increase in output.

Why and how to measure National Income at the prices of the Base Year?

The need to measure national income at constant prices arises because if prices are constantly rising or falling, there might be a possibility that national income at the current price provides a misleading picture of economic performance. However, with India’s high rate of inflation, nominal national income may provide a false sense of economic growth.

Example:

As shown in the above table, at the same output level, national income in 2020–21 is ₹35,000 at current year prices and ₹27,000 at base year prices. The ₹8,000 difference is not real. It does not accurately reflect economic growth because the increase is merely due to a rise in prices. As a result, real economic growth can only be measured using national income at constant prices.

How to convert National Income at the Current Price into a Constant Price?

This can be done by removing the effects of price changes on national income with the help of a suitable Price Index. A price index is an index number that shows the shift in the price level between two different periods of time. It indicates whether the increase or decrease in the national income from one year to the next is real or not. It is done using the following formula:

Example:

If the price index for the current year (2020-21) is 200 and the national income at current price is ₹1,00,000 crores, then calculate the national income at constant price.

Solution:

National Income at Constant Price = ₹50,000 Crores

Difference between National Income at Current Price and Constant Price