(A) Monetary national income:
Monetary national income is the money value of final goods and services produced by residents of a country in a year, measured at the prices of the current year.

Explanation:
When we multiply the production of all goods with the market price of respective goods what we get is called monetary national income. However, this monetary national income is not true income.

Reason:

• Suppose in the previous year, the production was ‘a’ and prices were ‘b’. National income of previous year = (production ‘a’) × (price ‘b’) = ab
• Now, suppose that the production in current year is equal to the production in the previous year but the prices have doubled in the current year. So, the prices in the current year become ‘2b’.
  National income of current year = (production ‘a’) × (price ‘2b’) = 2ab
• In this case the national income of current year will be double than that of the previous year which is actually not true because there is no change in production in the current year.

Drawback:

• Although the national income has increased, it has increased because the prices have increased and not because production has increased.
• This means that people have been consuming same amount of quantity current year as they used to in the previous year. So, we can say that consumption of product has not increased among people and so the overall standard of living has not improved.
• Hence, a country should focus not just focus on monetary national income.

(B) Real national income:
The calculation of national income at base-year price or fixed price is called real national income.

• Real national income is obtained by multiplying the production of all goods with the fixed price of respective goods during the year.
• Since, the real national income considers the price of the base-year, any rise in national income means that some rise has occurred due to the rise in production and some due to market price (current price). Hence, real national income shows the true situation of a country.

Advantage:
If national income increases due to increase in production it means that people consume more products or more people consume the products. In either case, since the production has increased the consumption and standard of living of people have become higher. Hence, real national income is a better measure of national income as compared to monetary income.