Gross Domestic Product etc - 34

Current vis-à-vis Constant Prices

3.17 The income regardless of the concept used is obviously measured at
prices prevailing during the year 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 increase, in real
terms, 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 recompile the whole series at given
prices of one particular base year. The income thus computed is termed as
‘income/product/expenditure at constant prices’ or in real term.

3.18 The 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 state
which is vital for a proper economic analysis and planning. The distribution of
state income by factor shares measure the changes in the shares of either
labour or capital or individuals partly owning capital and partly contributing
labour. This reflects not only the variations in the productivity of these groups
but also changes in their respective ownership position. Finally, at the point
of utilisation the changes in the shares of either consumption expenditure by
individuals and households or capital formation in the public and private
sectors give an idea of the economic welfare of the people and changes
therein as well as the extent by which the capital assets of the state are either
increasing or decreasing.[Reproduced   from CSO Publication]