Briefly explain the following basic concepts related to NI:
National Income at Current and Constant Prices (Nominal and Real NI).

National Income at Current Prices and Constant Prices (Nominal NI and Real NI) National income can be measured in terms of money in two ways :
(a)    at current prices, and (b) at constant 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 2007-2008 are valued at prices of the same year, i.e., 2007-2008, it will be called national income at current prices for the year 2007-2008. 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 current prices is called Nominal National Income.
(b)    National income at constant prices. 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 carefully chosen year which is a normal year free from price fluctuations. (Note that in India now 2004 - 2005 is treated as base year). For instance, if goods and services produced during the year 2006-2007 are valued at the prices of the base year (i.e., 2004-2005), it will be called national income at constant prices. 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). National income at constant prices is called Real National Income.
(c)    Significance of NI at constant prices (or Real National Income). (i) 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. How? 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 fastly, national income at current prices will also inflate even if there is no increase in the level of physical output. On the contrary, 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. 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 country.
(ii) 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.
(iii) Real national income is also helpful in making international comparison of economic performance of different countries.