CA Foundation · Business Economics · Determination of National Income
Which of the following is the correct relationship between GDP at market prices and GDP at factor cost?
GDP at factor cost equals GDP at market prices minus net indirect taxes, where net indirect taxes are indirect taxes less subsidies. Market prices include taxes and exclude subsidies, so removing the net tax element leaves the income actually earned by factors of production.
- AGDP at factor cost = GDP at market prices - net indirect taxesCorrect
- BGDP at factor cost = GDP at market prices + net indirect taxes
- CGDP at factor cost = GDP at market prices - depreciation
- DGDP at factor cost = GDP at market prices + subsidies + indirect taxes
Explanation
Market prices include indirect taxes and exclude subsidies, so they differ from the amounts factors of production receive. GDP at factor cost = GDP at market prices - (indirect taxes - subsidies), i.e. less net indirect taxes. Adding net indirect taxes would give the reverse conversion, and depreciation relates gross to net, not market price to factor cost.
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