National income can be measured in terms of money in two ways—at current prices and at constant prices.

When we say that national income is a single measure of economic growth of a country, we mean national income at constant prices and not national income at current prices.

(a) National Income at current prices:

If goods and services produced in a year are valued at current prices, i.e., prices prevailing in that particular year, we get national income at current prices. Current prices refer to the prices prevailing in the year in which goods and services are produced. For example, when goods and services produced during the year 2009-2010 are valued at prices of the same year, i.e., 2009-2010, it will be called national income at current prices for the year 2009-2010. Clearly, in determining national income at current prices, not only physical output produced during the year is important, but also the prices prevailing in that year are equally important.

National income at constant prices is called real national income whereas national income at current prices is called nominal national income.

(b) National income at constant prices:

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If goods and services produced in a year are valued at fixed prices, i.e., prices of the base year, we get national income at constant prices. Constant prices refer to the prices prevailing in the base year. A base year is a carefully chosen year which is a normal year free from price fluctuations. (In India now 2004-2005 is treated as base year.)

For instance, if goods and services produced during the year 2008-2009 are valued at the prices of the base year [i.e., 2004-2005), it will be called national income at constant prices for the year 2008-2009. Evidently, it is change in volume of physical output produced during the year which affects national income at constant prices because prices remain fixed (constant).

(c) Significance of difference between current prices and constant prices:

(i) National income at current prices is affected by two factors, namely, (a) change in prices and (b) change in physical output (amount of goods and services produced). If the current prices rise rapidly, national income at current prices will also inflate even if there is no increase in the level of physical output. Consequently, national income at current prices becomes deceptive and fails to reflect the growth in real national output. For example, in 1979-80, India’s national Income at current prices increased by 9.1% but at constant prices it decreased by 5.2%.

(ii) National income at constant prices is affected by only one factor, namely, change in physical output. It can rise only when there is an increase in the level of physical output because here prices are kept constant or fixed.

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Since a country is interested in its physical output, it is considered proper and desirable to estimate national income at constant prices because it reflects truly the real change in physical output of a county. When there is continuous rise in national income at constant prices for a number of years, it means there is economic growth. However, the same increase in national income at current prices is not an indicator of economic growth.

Advantages of Real National Income/GNP:

(iii) National income measured at constant prices truly reflects the real change in 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.

(iv)Real national income (or for that matter GNP) enables us to make a year to year comparison of changes in the volume of output of goods and services.

(v) Real national income is also helpful in making international comparisons of economic performance of different countries.