Many of these alternatives are based on a fixed basket of goods. Real values measure the purchasing power net of any price changes over time. A general increase in prices is known as inflation and a general decrease in prices is known as deflation. This includes the prices of goods and services from businesses and the government as well as any purchased by consumers. This would have been a very simple thing to do if there was only one good or service in the economy, like in our last example, apples. A calculation has been made in Table 8. It compares the price of the fixed basket of goods and services to the price of a basket in the base year.
You will find the calculation of the entire goods produced on the domestic level in a year that are then weighted by the market value of the entire consumption of every good and service. And I want you to just sit and think about this for a second. Well, that's going to be the same thing as the ratio of the prices between year two and year one. Or another way to think about it is things have gotten 10% more expensive. It's just saying, look, these are measuring the same goods and services.
To calculate the rate of inflation, we calculate approximate value of the price-index number for the year 1992-93 using the formula: Thus approximate price index for the year 1991-92 is 258. Part of the increase in national income at current prices is due to increase in prices and increase in output. Suppose, in a particular year, nominal output produced is exactly the same that it produced in the last year. We see that right over here. Assigns fixed weights to prices of different goods. In , it's helpful to be able to measure the relationship between aggregate output measured at current prices and aggregate output measured at constant base year prices. Let's look at how this effect can create confusion.
An economy may appear to produce more goods and services because money has increased, but this may simply reflect price increases without any increase in physical output. If this price increase is eliminated, national income would increase to Rs. The table below shows the quantity produced and prices of both goods for three consecutive years 2015, 2016, and 2017. The gross national income is another similar concept. A deflator above 100 is an indication of price levels being higher as compared to the base year 2012 in this case. That market value depends on the quantities of goods and services produced and their respective prices. That base year could have been 1985.
Real values measure the purchasing power net of any price changes over time. Therefore, it is commonly used by economists and policy makers as a measure of inflation, together with the see also. In economics, a nominal value is expressed in monetary terms. We'll go into more depth about the concept and illustrate an example of how it is calculated. And there are goods and services in year two that didn't exist in year one. As a result, index number of prices rose from 100 to 125. In the last video, we studied a super simplified economy that only sold one good or service.
The exercise of these economics methods are obvious as they are used for the prime goal of finding out the price inflation and reflect the current economic state of a particular country. So maybe in year two your deflator would be at 98. However, things become more interesting when we look at the the following years. There are tables available which show the year, , and percentage. You could have just taken the price of apples. Nominal national income is measured at current market prices.
In other words, it eliminates the effects of price changes over time. The , for example, measures the level of retail prices of goods and services at a specific point in time. Or you could actually had prices go down. But now let's think about things a little bit more generally, or a little bit more complex economies. Basically, it takes all of the price changes out of the equation so that historical numbers can be accurately compared with current numbers. This allows us to eliminate the effects of inflation.
This number is used to roughly calculate the size of a particular economy. Some prices to go down. So one way to think about it is really just a ratio. On the contrary, it also does not face the threat of deflation such as Aruba and Liechtenstein. First, the is determined by finding the value of the products and services generated within a year or another set time period and within the borders of the country in question.