Continuing the previous article, GDP at Factor cost means, money value of everything produced in India, without counting Government’s role in it. i.e. indirect tax and subsidies.
1 kg. Urea fertilizer’s original-price is 500 Rs.
When it reaches the local supplier, Government is giving 10% subsidy. So farmer purchases it @ (500-50)=Rs. 450
- GDP @ Factor cost= 500 [i.e. without Government's involvement]
- GDP @ Market price= 450 [with Government's involvement]
Box of 10 Blank DVDs =Rs.100 +10% VAT so final M.R.P.=Rs.110
- GDP @ Factor cost=Rs.100 (Real value of those dvds)
- GDP@ Market price=Rs.110
How will you calculate GDPMP if GDPFC is given, & vice versa?
GDP@Market price=GDP@ Factor price+Government involvement
Now, Government involvement=+Indirect taxes-subsidies
GDP@Market price=GDP@Factor cost+Indirect tax-subsidies
Or doing the reverse,
GDP@Factor cost=GDP@market price-Indirect tax+subsidies
Still doubt (like I always had about everything in college)? Following table should clarify it.
|GDP @ Factor Cost and Market Price for same Urea and Blank DVDs|
As you can see, Factor cost= Original or real value of something.
So at marketprice, even when Government is giving subsidy, the manufacturer still receives the original price. E.g. although farmer pays Rs.450, still manufacturer gets Rs.500 so we ‘add’ subsidy when converting MP to FC.
Similarly, even when customer pays MRP of DVD is 110, the DVD-manufacturer is still getting 100 Rs. So we ‘deduct’ the indirect tax(VAT) while converting MP to FC.
NNPFC and NNPMP
GNP = everything produced inside India + Anil Kapoor’s income from Hollywood – Gary Kirsten’s remittance to S.Africa (more here)
So, what is Net National product @ Factor cost, and @Market price.
Net = Gross minus depreciation.
So NNP=GNP minus depreciation.
And factor cost, market price, just as explained above..with and without Government intervention.
To be continued.. GDP @ Current Price and Constant Price, GDP deflator