GDP at Factor Cost and Market Price

Check out the details about GDP at Factor Cost and Market Price.

Factor cost is the cost incurred on the factor of production. It can be defined as the actual cost incurred on goods and services produced by industries and firms is known as factor costs.
Factor costs include all the costs of the factors of production to produce a given product in an economy. It includes the costs of land, labour, capital and raw material, transportation etc. They are used to produce a given quantity of output in an economy.
The factor cost does not include the profits made by the producing firms or industries or the tax which they incur on producing those goods and services.

GDP at Factor Cost

The factor cost does not include the taxes that are paid to the government since taxes are not directly involved in the production process and, therefore, are not a part of the direct production cost.
However, subsidies received are included in the factor cost as subsidies are direct inputs into production.

Factor Cost = Cost of Production + Subsidies – Taxes

GDP at Factor Cost= Sum of all Gross Value Added (GVA) at factor cost

It refers to the amount of money for which an asset can be sold in a market.
The market price of a commodity is closely linked with the demand and supply factors of the commodity.

GDP at Market Price

GDP at market price is the price which is set after all the levels of value additions and at which goods and services are sold or offered in the marketplace.
Conventionally, the market price is the sum of the cost of production and indirect taxes.

Market Price (MP) = Cost of Production or factor cost + Net Indirect Taxes

Net Indirect Taxes = Indirect Taxes – Subsidy

When the price of the commodity rises, its demand falls, and when the price of the commodity falls, its demand rises.
A commodity’s supply is directly related to the price of that commodity. When the price of the commodity rises, its supply also increases, and when the price of the commodity falls, its supply falls.
A commodity’s supply is inversely related to the taxes levied on its production. An increase in taxes leads to an increase in the marginal cost. It causes a decrease in the profit margin of the producers, and hence, supply falls.