What is National Income at Constant Prices? What is intermediate consumption?
National Income at Constant Prices:
When goods and services produced in an accounting year are valued at the base year prices, it is called national income at constant prices. The new base year of India is 2004-05. The national income at constant price reflects the change in volume of output produced during the year which affects the National income at constant prices.
It is also known as real national Income. it also help in year to year comparison of changes in volume of output produced. Current price estimates can be converted into constant price estimates by applying the simple formula:
Constant price estimate = Current price estimates / current year price index * base year price index
This shows that although at current prices the increase in National income is 100%, but in real terms national income grows by only 33%.
Intermediate consumption is consumption of goods and services not for direct satisfaction but for further use to produce goods and services. e.g. a bread manufacturer purchases wheat from other producer. This will be considered as intermediate product as it was purchased to carry production of bread. As per definition given by SNA, intermediate products are the goods and services wholly used up during the course of production in the given accounting year.
Two conditions to be fulfilled by goods and services to get classified as intermediate product are:
- It must be purchased from other production unit.
- It should be acquired for resale purpose and should be fully used up during the course of production. e.g. rice purchased by restaurant, cloth purchased by garment factory etc. the cost incurred on such goods is known as intermediate costs and is included in the price of the good produced by them.