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SEMESTER – II

1.   Q.3. Explain
the concept of National Income Deflator.

ANS:

When we divide nominal
national income by real national income, we obtain the national income
deflator. The real national income can be calculated by dividing nominal
national income by the national income deflator. The national income deflator
for various years given is given in Table 1.5.

You may notice from Table 1.5
that when we divide the nominal national income by the real income, we can
obtain national income deflator. However, to find out the real national income
one needs the price index of the relevant years. Once, we have the current year
price index number, we can find out the national income of the current year by
dividing the nominal national income of the current year by the current year
price index and multiply the quotient by hundred. Alternatively, the national
income deflator can be found by dividing the current year price index by the
base year price index. Since the base year price index is always hundred, the national
income deflator can be simply found by moving the decimal points by two digits
to the left. For instance, the wholesale price index in the year 2015-16
divided by 100 would give the national income deflator as 1.2206. You may
notice that we have simply shifted the decimal point by two digits to the left.
Now when we divide the nominal national income or the national income at current
prices by the national income deflator, we can obtain the real national income.
For example, Rs.121.62 Trillion divided by 1.2206 will give us Rs.99.63
Trillion which is the real national income for the year 2015-16.

 

 

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