Gross Domestic Product etc - 12

Current versus Constant Prices

1.31 National income regardless of the concept is obviously measured at
prices prevailing during the period or in other words at current prices. When
calculated over a number of years, the changes in national income would,
therefore, include implicitly not only the effect of the changes in production but
also the changes in prices. This estimate compared over the period would
not, therefore, give a proper measure of the overall real increase in production
of the country or the economic welfare of the people or growth of the
economy. Therefore, it would be necessary to eliminate the effect of prices,
or in other words to recompute the whole series at given prices of one
particular base year. National income thus computed is termed as national
income at constant prices or in real terms.
1.32 The national income in real terms provides a measure of the growth of
the economy. When available by industry of origin, these estimates give a
measure of the structural changes in the pattern of production in the country
which is vital for economic analysis. The distribution of national income by
factor shares measures the changes in the shares of either labour or capital
or individual partly owning capital and partly contributing labour. This reflects
not only the variation in the productivity of these groups but also changes in
their respective ownership position. Finally, at the point of utilisation, the
change in the shares of either consumption expenditure or capital formation
give an idea of the common welfare of the people and changes therein as well
as the extent by which the capital assets of the country are either increasing
or decreasing.[Reproduced from CSO Publication]