Page
Money Value Vs Value In Real Terms
Completion requirements
View
The main reason for calculating national income is to provide an indication of the actual quantity (or volume) of goods and services produced during a particular year’ and compare them to previous years.
Look at the table below:
|
|
Total output Yo-Yo’s (Rand) |
Index of prices |
|
Year 1 Year 2 Year 3 |
100 000 120 000 150 000 |
100 120 132 |
Between year 1 and year 2 the money value of the total production of yo-yo’s increased by 20% from R100 000 to R120 000. The price of yo-yos also rose by 20% over the same period, so the value of the total output in year 2 in terms of year 1 prices is:
R120 000 x 100/120 = R 100 000
This calculation enables us to remove the effect of inflation in the numbers. This calculation shows us that no increase in production took place between years 1 and 2. In year 3 the money value of the total production of yo-yos rose by another 25% (to R150 000), while prices increased by 10% (132-120/120 x 100). The value of the output in year 3 in terms of year 1 prices is:
R150 000 x 100/132 = R113 636
Although the monetary value of total yo-yo production rose by 50% (nominal terms) between years 3 and 1, the actual volume of production increased by only 13.63%(real terms).