the difference between national income at market price and national income at factor cost is

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[Solved] Difference between the national income at factor cost and na

The correct answer is indirect taxes and subsidies. Key Points The difference between the national income at factor cost and national income at ma

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Difference between the national income at factor cost and national income at market prices arises from:

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indirect taxes and subsidies

direct taxes and subsidies

indirect taxes and direct taxes

only indirect taxes

Answer (Detailed Solution Below)

Option 1 : indirect taxes and subsidies

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The correct answer is indirect taxes and subsidies.

Key Points

The difference between the national income at factor cost and national income at market prices arises from indirect taxes and subsidies.

Subsidies refer to the difference between the Market Price and the Cost of Production.National Income at Factor Cost

​Net National Product at factor cost is also called national income.

Net National Product at factor cost is equal to sum total of value added at factor cost or net domestic product at factor cost and net factor income from abroad.

NNP at Factor Cost = NNP at Market Price – Net Indirect tax.

Factor cost is the total cost of all the factors of production consumed or used in producing a good or service.

National Income at Market Price

​It refers to the total market value of all the final goods and services produced by the normal residents of a country both within the domestic territory as well as outside the country.

National income at market price = National income at factor cost + Net indirect taxes.

Thus, the market value of the national product exceeds the income paid to the factors of production by the amount of indirect taxes

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Relation between National Income at Market Price and at Factor Cost

ADVERTISEMENTS: Relation between National Income at Market Price and at Factor Cost! Indirect Taxes: The phrase at factor cost is to be contrasted with the phrase at market price. Goods produced are sold at market prices which including the indirect taxes imposed by the Government. Indirect taxes are levied on commodities, such as excise duty […]

Relation between National Income at Market Price and at Factor Cost

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Relation between National Income at Market Price and at Factor Cost!Indirect Taxes:

The phrase at factor cost is to be contrasted with the phrase at market price. Goods produced are sold at market prices which including the indirect taxes imposed by the Government. Indirect taxes are levied on commodities, such as excise duty on beer and cloth, etc. Thus, the market value of the national product exceeds the incomes paid to the factors of production by the amount of indirect taxes.

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Hence, net national income at factor cost shows the income actually received by the factors of production. Let us presume that the actual cost of producing a certain output is Rs. 100 which is given to different factors of production as wages, rents, interest and profits.

The Government imposes taxes worth Rs. 25 on his output, so that it is sold in the market for Rs. 125. This is the market value of output, while income payments made to factors of production amount to Rs. 1 GO only. Thus, from the money value of NY at market price we deduct the amount of indirect taxes to arrive at the national income at factor cost. NY at MP = Indirect Taxes = national Income at factor cost. Subsidy, on the other hand, causes the market price to be less than the factor cost. Subsidy is an aid in money.

Suppose handloom cloth is subsidized at the rate of 10 paise per yard and sells at 90 paise per yard. Thus, while the consumer pays 90 paise per yard the factors of production will receive Re. 1 per yard. The money value of cloth at factor cost would be equal to its market price plus the subsidies paid on it.

NY at Factor Cost = NY at NP plus Subsidies minus Indirect Taxes:

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Government surplus:

Sometimes Government renders productive services and earns profits. These profits or surplus earned by the Governments must be deducted before we can find out Met national Income at Factor Cost because profits do not go to factors of production in the form of incomes but are deposited in the Government treasury and, therefore, must be deducted.

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National Income at Market Price and Factor Cost

In this article we attempt to explain the relationship between National Income at Market Price and Factor Cost

Relationship Between Concepts Of National Income At Market Price And Factor Cost

Leave a Comment / Macroeconomics, Study Materials / By Enotes World

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After discussing several key concepts of national income at market price as well as at factor cost, in this article, we attempt to establish the relationship between concepts of national income at market price and factor cost.

As we know that various concepts of national income can be measured in terms of market price as well as factor cost. If such concepts are measured in terms of market price that represents the expenditure approach and if they are measured in terms of factor cost, then that represents the income approach of measuring national income.

There is a difference between market price and factor cost due to the inclusion of net indirect tax by the market price. Thus, if the amount of net indirect tax is added to factor cost then the resulting amount will become the market price. It means factor cost can become the market price of the value of the net indirect tax added to the value of factor cost. Here the net indirect tax is indirect tax minus production subsidies.

With this note, we can develop the relationship between market price and factor cost and accordingly between values of components of national income at market price and factor cost.

For example, if the value of Gross Domestic Product (GDP) is given at market price then by deducing the value of net indirect tax from GDP at the market price we can get the value of GDP at factor cost. Similarly, if GDP at factor cost is given then by adding the value of net indirect tax to GDP at factor cost, we easily can obtain the value of GDP at market price.

Since market price includes the amount of net indirect tax, generally the value of concepts of national income in terms of the market price is higher than that of a factor cost.

The relationship between concepts of national income at market price and factor cost can be presented with help of the following expression and table.

Market Price (MP) = Factor Cost (FC) + Net Indirect Tax (NIT)

Factor Cost (FC) = Market Price – Net Indirect Tax (NIT)

Where Net Indirect Tax (NIT) = Indirect Tax – Business Subsidies

Concepts from Market Price to Factor Cost

GDP at FC = GDP at MP – Net Indirect Tax

NDP at FC = NDP at MP– Net Indirect Tax

NGP at FC = GNP at MP – Net Indirect Tax

NNP at FC = NNP at MP – Net Indirect Tax

Hint: Factor Cost = MP – NITConcepts from Factor Cost to Market Price

GDP at MP = GDP at FC + Net Indirect Tax

NDP at MP = NDP at FC + Net Indirect Tax

NGP at MP = GNP at FC + Net Indirect Tax

NNP at MP = NNP at FC + Net Indirect Tax

Hint: Market Price = FC + NITSee the following casesCase- I

If the gross domestic product (GDP) at MP = $2000, Net factor income from abroad (NFIA) = $ 50, Depreciation = $10, Indirect Tax = $ 30, Subsidy = $20, then compute NDP, GNP, and NNP at market price and then convert them into factor cost.

Solution Here given

Gross domestic product (GDP) = $ 2000

Net factor income from abroad (NFIA) = $50

Indirect tax = $ 30 Subsidy = $20 Depreciation = $ 10

Now calculation of NDP, GNP, and NNP at the Market Price

As we know

Net domestic product (NDP) at Market Price = GDP at MP – Depreciation = $2000-$ 10 = $1990

Gross national product (GNP) at Market Price = GDP at MP + NFIA = $2000+$50 = $2050

Net national product (NNP) at Market Price = GNP at MP – Depreciation = $2050 – $10 = $2040

Or

NNP at MP = NDP at MP + NFIA = $ 1990+$50 = $ 2040

Again, converting conceits of national income at market price into factor cost

So, we know that

GDP at Factor Cost = GDP at MP – NIT = $2000-$10 = $1990

NDP at Factor Cost = NDP at MP – NIT = $1990-$10 = $1980

GNP at Factor Cost = GNP at MP -NIT= $2050-$10 = $2040

NNP at Factor Cost = NNP at MP – NIT = $2040-$10 = $2030

Where NIT = Indirect tax – Subsidy = $30-$20 = $ 10

Therefore, value at a market price easily can be transformed into value at factor cost by reducing the amount of net indirect tax.

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