The expressions like national income at constant prices and national income at current prices are very often used in national income analysis.
(1) National income at constant prices:
Constant price refers to the price ruling in the market in the base year. It is the price of a commodity in the base year. Thus constant price means the base price of commodity. When the value of goods and services produced during a given year is measured on the basis of prices of a particular past year and not on the basis of prices of the current year in which goods are produced, the estimation of national income is called national income at constant price. For example if we calculate national income in India for (1998-99) according to the ruling prices in the year 1980-81, we are said to calculate our country’s national income for the year 1998-99 at constant prices.
(2) National Income at Current Prices:
Correct prices on the other hand, refers to the prices ruling in the market during the year in which goods are produced and for which estimation of income is to be made. When the value of goods and services produced during a year is calculated of the market prices of the same years, the estimate of national income is said to be at current prices. For example if the national income of India for year 1998- 99 is calculated on the basis of the ruling market prices of 1998- 99, we get National income at current prices.
Thus when national income is, calculated, goods and services are multiplied by their respective prices. If national output is multiplied by present ruling price, we obtain national income at current prices. On the other hand if the national output is multiplied by the base price if called national income at constant price. But what is seen is that prices of commodities go on changing. When the current outputs are multiplied by the current prices it will give rise to monetary national income. Thus N1 at current prices is the aggregate money values of all final goods and services basing on the current price.
From the above table it is found that national income at current prices is 29,700 whereas the national income at constant prices is 14,100. N.1 at current price is more because the prices of current year are immensely high. The increase in product or income is not due to increase in product or output but due to the rise in price level. This increase in national income cannot be said to be the increase in real income. Real income can be assessed by converting national income at current prices into income at constant prices with a fixed base year. In order to assess the real income we need to know the price index of the current year. The formula for calculating income at constant price is given as follows.
Real National Income
National Income at Current price
Or, National Income at =, ———————- ————– x 100
Price Index number.
Constant prices for 1998-99