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Money Value Vs Value In Real Terms
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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 monetary value of the total production of yo-yo’s increased by 20% from R100 000 to R120 000. The price of yo-yo’s 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 monetary value of the total production of yo-yo's 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).