Question

Give the relationship between money national income and real national income.

Answer 1

1. Money national income (Nominal national income): This is the national income measured in current prices, i.e., the value of all final goods and services produced in a country during a given period, measured at the prices prevailing in that period. It is also called nominal national income. It reflects changes both in output and prices.

2. Real national income: This measures the national income in terms of the physical volume of goods and services produced, by removing the effects of price changes (inflation or deflation). Real national income is expressed by valuing the output at constant base year prices. It shows the true growth in the quantity of goods and services produced, excluding price effects.

Real national income = `"Money national income"/"Price level index"`

Money national income = Real national income × Price level index

• Price level index = 100 in the base year.
• Reflects the impact of inflation or deflation on the purchasing power of money.