Current and constant prices
As the level of economic activity between households and firms increases, output is also likely to increase. However, under certain circumstances the price level may also be driven up.
The nominal value of national income, or any other aggregate, is the value of national output at the prices existing in the year that national income is measured – that is, at current prices. In simple terms the ‘nominal’ value of national income can be found by multiplying the quantity of output by the retail (market) price of this output.
If demand increases at an unsustainable rate, resources become increasingly scarce, and firms will raise prices. Similarly, wages are likely to rise as the labour market clears and unemployment falls. The more that workers are needed the higher the wage rate. This will act as an incentive for workers to enter this industry. The combined effect of higher wages and prices is that the nominal value of national output may be driven up, rather than its real value.
To find the real value of changes in output under inflationary conditions, the effects of any general price increase (price inflation) must be taken into account. This is done by holding prices constant from a starting measure, called the base year.
Though the definition advanced by Marshall is simple and comprehensive, yet it suffers from a number of limitations.
First, in the present day world, so varied and numerous are the goods and services produced that it is very difficult to have a correct estimation of them. Consequently, the national income cannot be calculated correctly.
Second, there always exists the fear of the mistake of double counting, and hence the national income cannot be correctly estimated. Double counting means that a particular commodity or service like raw material or labour, etc. might get included in the national income twice or more than twice.