Question

Why is the increase in prices adjusted to calculate the real national income?

• A. To normalise income inequality
• B. To reflect the actual purchasing power
• C. To eliminate social inequalities
• D. To reflect the foreign exchange rate

Answer 1

The correct option is B To reflect the actual purchasing power

We know that values and prices tend to inflate or increase over time. When we estimate the income based on increased prices, the values or incomes get inflated. So, to calculate the real or actual change in national income, we have to remove the effect of increased prices on income.

This price-adjusted income reflects the real purchasing power of income. Thus, real national income maintains price stability and fosters development.