National Income - Current vs. Constant Prices part 11

 Okay, here are the notes summarizing the key concepts discussed in the video about National Income at Current and Constant Prices:

Topic: National Income - Current vs. Constant Prices

1. Two Main Concepts for Measuring National Income:

• ప్రస్తుత ధరల వద్ద జాతీయ ఆదాయము (National Income at Current Prices): National Income calculated using the prices prevailing in the same year the income is generated.

• స్థిర ధరల వద్ద జాతీయ ఆదాయము (National Income at Constant Prices): National Income calculated using the prices from a fixed Base Year.

2. Alternative Names & English Equivalents:

• National Income at Current Prices:

  • Also called: నామమాత్రపు జాతీయ ఆదాయము (Nominal National Income)

  • English: National Income at Current Price / Nominal National Income

• National Income at Constant Prices:

  • Also called: వాస్తవ జాతీయ ఆదాయము (Real National Income)

  • English: National Income at Constant Price / Real National Income

3. Why Two Measures?

• To differentiate between the increase in national income due to an actual increase in the production of goods and services versus an increase simply due to rising prices (inflation).

• Nominal NI: Reflects changes in both production quantity and price levels. An increase might look large but could be mostly due to inflation.

• Real NI: Isolates the change in production quantity by keeping prices constant (using Base Year prices). This provides a truer picture of economic growth and potential welfare improvement. Growth due to increased production is desirable; growth solely due to inflation is not.

4. Base Year Concept:

• A specific year chosen as a reference point for prices.

• Prices from the Base Year are used to calculate National Income at Constant Prices for subsequent years.

• Criteria for Selection: Typically a 'normal' year, relatively recent, and free from major economic disturbances (like droughts, wars, high inflation).

5. Calculation Illustration:

• Nominal NI (Current Prices): Current Year Production Quantity * Current Year Average Price.

  • Example: Year 1: 5000 units * Rs 5 = Rs 25,000. Year 2: 6000 units * Rs 6 = Rs 36,000. (Increase = Rs 11,000)

• Real NI (Constant Prices): Current Year Production Quantity * Base Year Average Price.

  • Example (Assuming Base Year Price = Rs 3): Year 1: 5000 units * Rs 3 = Rs 15,000. Year 2: 6000 units * Rs 3 = Rs 18,000. (Increase = Rs 3,000 - reflects real production growth).

6. Price Indices:

• Used to measure the change in price levels over time relative to the base year.

• Base Year Price Index: Always set to 100.

• Current Year Price Index: Reflects the average price level of the current year relative to the base year's price level (x 100).

  • Example: If Base Price=Rs 10 and Current Price=Rs 12, Current Index = (12/10)*100 = 120.

7. Converting Between Nominal and Real NI:

• Real NI = (Nominal NI / Current Year Price Index) * 100 (Base Year Index)

  • Example: Nominal NI = Rs 6000 Cr, Current Index = 120. Real NI = (6000 / 120) * 100 = Rs 5000 Cr.

• Nominal NI = (Real NI * Current Year Price Index) / 100 (Base Year Index)

8. Deflator and Inflator:

• GDP Deflator: A tool/index used to remove the effect of inflation from Nominal NI to arrive at Real NI. It essentially measures the price level change.

  • Purpose: To "deflate" the nominal value.

  • Calculation is linked to the conversion formula above.

• GDP Inflator: A tool/index used to convert Real NI into Nominal NI by adding the effect of price changes.

  • Purpose: To "inflate" the real value to current prices.

  • Calculation is linked to the conversion formula above.

9. Base Years in India (History):

• National Income Committee: 1948-49

• CSO (Central Statistical Organisation) / NSO (National Statistical Office):

  • 1960-61

  • 1970-71

  • 1980-81

  • 1993-94

  • 1999-2000 (Recommended by Abhijit Sen Committee)

  • 2004-05

  • 2011-12 (Current Base Year, Recommended by Sundaram Committee)

10. Key Takeaway:

• Real National Income (at Constant Prices) is considered the better indicator of true economic growth and development as it removes the distorting effect of price changes (inflation).

• In the Base Year, Nominal NI = Real NI.