NNP at Market Price and National Income at Factor Cost. The phrase at factor cost is to be contrasted with the phrase at market prices. Goods produced are sold at market prices which include the indirect taxes imposed by the Government.
The phrase at factor cost is to be contrasted with the phrase at market prices. Goods produced are sold at market prices which include the indirect taxes imposed by the Government. Indirect taxes are levied on commodities, such as excise duty on beer and cloth etc.
For example, suppose a manufacturer produced a product and the cost of production t is INR 100, which is given to different factors of production as wages, rents, interest and profits. The Government declared a subsidy of INR 5 rupee per product.After production the govt imposed indirect taxes worth INR 25 on this output
Now the market price of the product = 100 + 25 – 5 = 120
The 5 rupees subsidy will go to the manufacturer/factor of production.
now the manufacturer gets = 100 + 5 = 105 which will be goes to different factors of production.
so to go from market cost to factor cost
factor cost = market cost-indirect tax+subsidy = 120 – 125 + 5 = 100