Base year
Year used as the beginning or the reference year for constructing an index, and which is usually assigned an arbitrary value of 100. The estimates at the prevailing prices of the current year are termed as "at current prices", while those prepared at base year prices are termed "at constant prices". The comparison of the two estimates gives the measure of real growth. It means the production of the current year is valued at base year prices so that the real growth is worked out by deducting the impact of inflation or deflation. The base year of the national accounts is changed periodically to take into account the structural changes which take place in the economy and to depict a true picture of the economic growth.
Typical feature of a base year is that it should be relatively stable year without too high or too low output or growth. Also it may not be a drought year or a year with too heavy rains.
National Income at Current Prices
When goods and services produced by normal residents of a country in a given year are estimated at current prices, it is called national income at current prices. Current prices refer to the prices prevailing during the year for which estimates are made.
Thus it is estimation of goods and services produced during a year on the basis of the prices of the same year. For national income at current prices, we use same year’s output and same year’s market prices. Such data reflects the state of economic affairs of that year but does not show real change in national income because prices keep on changing.
National Income at Constant Prices
When goods and services produced by normal residents of a country during a year are valued at fixed prices, i.e. prices of the base year, it is called national income at constant prices.
Constant prices refer to the prices prevailing in the base year.
Every country measures national income both at current prices and constant prices but it is the latter which indicates real change in national income.