2.7. The concept of Market Price and Factor Cost

Market price refers to the actual transacted price of goods and services. It includes the indirect taxes which raise the prices and subsidies which lower the price.

Factor cost refers to cost of all factors of production used or consumed in producing goods and services. It includes rent for land, interest for capital, wages for labor and profit for entrepreneurship. It is the actual production cost at which the goods and services are produced by the firm. Thus, indirect taxes are excluded and subsidies by the government are included while calculating Factor Cost.

In other words, Factor Cost (FC) = Market Price – Net Indirect Taxes Where, Net Indirect Taxes (NIT) = Indirect Taxes – Subsidies Therefore, Factor Cost = Market Price - Indirect Taxes + Subsidies

Using this concept, the GDP at factor cost can be calculated by subtracting Net Indirect Tax from GDP at Market Price.

Or, GDP at Factor Cost = GDP at Market Price – Net Indirect Tax

Or, GDP at Factor Cost = GDP at Market Price – Indirect Tax + Subsidies Similarly, GNP at Factor Cost = GNP at Market Price – Net Indirect Tax NDP at Factor Cost = NDP at Market Price – Net Indirect Tax

NNP at Factor Cost = NNP at Market Price – Net Indirect Tax