Question

Consider that you are living in a “SIMPLE ECONOMY” in which the following goods are produced: Chicken, Machine, Rice, and Iron. Let’s assume that in 2019, the Chicken was sold for Price 2, and the quantity purchased is 20 units. Machines were purchased for Price 15 and Quantity is 40units. Rice was sold for Price 28 and Quantity purchased is 20 units. Iron is purchased at the price of 12 and 19 units have taken. In the 2020 year Quantities for these items are the same but the price is like for the Chicken Price is 3, for the Machine Price is 18, for the Rice price is 35 and for the Iron price is 18. All the Price is in OMR and Quantities are in Units. Questions: 1) Read and identify that what is happening to the overall “PRICE LEVEL” and name and explain the phenomenon/ concept in your own words. 2) From the given information calculate the National Income at CONSTANT PRICE AND CURRENT PRICE by preparing the neat TABLE for the items Chicken, Machine, Rice, and Iron as. 3) What do you feel from the calculation is there any change in National Income at current price and National Income at a constant price? Is that Real or Illusory? Justify your reason

Answer 1

COMMODITY	2019	2020
PRICE	QUANTITY(UNITS)	PRICE	QUANTITY(UNITS)
Chicken	2	20	3	20
Machine	15	40	18	40
Rice	28	20	35	20
Iron	12	19	18	19

Ans - 1) Reading the above table , we can say that the PRICE LEVEL of all the 4 commodities viz chicken, machine , rice and iron has risen from 2019 to 2020. This phenomena is called Inflation.

It refers to the increase in general price level in the economy . It leads to increase in consumer prices and increases the value of basket of goods thereby reducing the purchasing power of people.

Ans-2 ) National Income at Constant PRICES (2019) = 2 20 + 15 40 + 28 20 + 12 19

= 40 + 600 +560 + 228

   = 1428

National Income at Constant prices (2020) = 2 20 + 15 40 + 28 20 + 12 19

   = 40 + 600 + 560 + 228

   = 1428

(Here we have used 2019 as base year to calculate the national income at constanmt prices in 2020. It means Prices of 2019 will be used)

National Income at Current Prices (2019) = 2 20 + 15 40 + 28 20 + 12 19

= 1428

National Income at Current Prices (2020) = 3 20 + 18 40 + 35 20 + 18 19

   = 60+ 720 + 700 + 342

= 1822

Ans- 3 ) There is a change (increase) in nominal GDP i.e. National income at current prices .

There is no change in the real gdp i.e. National income at constant prices .

This means there is no inflation as per the calculation because real GDP is adjusted with inflation . The same value of real GDP(NI at constant prices) shows there is no inflation .

But this situation is ILLUSIONARY . We have got such results because the quantities have been same in both the year and using the same prices in 2019 and 2020 will automatically yield same results . But this is not the actual situation as we have seen the prices have risen . The value of market basket has surely risen . The effect of inflation in the real GDP (NI at constant prices ) can be seen if the quantities are increased in the year 2020 . So we can make out from the value of market basket of goods to see if there is inflation in this case .

Due to same quantities in both years the real GDP has not changed and is presenting an illusionary picture that there is no inflation . However , actually there is inflation in the economy.