Constant prices

Constant Prices
Definition Constant Prices
Constant prices are a way of measuring the real change in output.

Constant prices
Definition: Values that are expressed in such a way as to enable comparisons to be made across a period of years.

Constant prices - Currency expressed in terms of real purchasing power, using a particular year as the base or standard of comparison.

Using indifference curves and an assumption of constant prices and a fixed income in a two good world will give the following diagram. The consumer can choose any point on or below the budget constraint line BC.

REAL GROSS DOMESTIC PRODUCT: The total market value, measured in constant prices, of all goods and services produced within the political boundaries of an economy during a given period of time, usually one year.

For a more accurate indication of economic growth, the impact of inflation or deflation can be removed to produce (inflation-adjusted) real GDP or GNP (also called at constant prices). This is done by applying a price deflator to nominal GDP/GNP.

A recalculation of the nominal figure for gross domestic product to remove the effects of inflation. The value of the components of GDP are recalculated at constant prices from the previous year or from some fixed base year.

Nominal GNP measures the value of output expressed in present day prices, while Real GNP measures output value in constant prices (i.e. taking account of inflation). The latter is the better indicator of the country's economic growth.

The property of the Heckscher-Ohlin Model that, at constant prices, an increase in the endowment of one factor increases the output of the industry that uses that factor intensively and reduces the output of the other (or some other) industry.

See also: Base year, Gross domestic product, Feedback, Tip, National income