Question

Explain the concept of GDP at market price and GDP at factor cost.

Hint:

If Net Indirect Taxes are positive, $\text{GDP}_{\text{MP}}$ will always be higher than $\text{GDP}_{\text{FC}}$.

Answer 1

Step 1: Understanding the Concept:
Gross Domestic Product (GDP) can be valued either at the stage of production (Factor Cost) or at the stage of sale in the market (Market Price).

Step 2: GDP at Factor Cost ($\text{GDP}_{\text{FC}}$):
It refers to the sum total of factor incomes (compensation of employees, rent, interest, and profit) generated within the domestic territory of a country during a year. It excludes taxes and includes subsidies.

Step 3: GDP at Market Price ($\text{GDP}_{\text{MP}}$):
It is the market value of all final goods and services produced within the domestic territory. It includes Indirect Taxes (which increase price) and excludes Subsidies (which decrease price).

Step 4: The Relationship Formula:
The two concepts are linked by Net Indirect Taxes (NIT): \[ \text{GDP}_{\text{MP}} = \text{GDP}_{\text{FC}} + \text{Net Indirect Taxes (NIT)} \] Where, $\text{NIT} = \text{Indirect Taxes} - \text{Subsidies}$.
Final Answer:
$\text{GDP}_{\text{FC}}$ is the production cost; $\text{GDP}_{\text{MP}}$ is the retail price including taxes.