Gross Domestic Product etc - 11

Factor Cost versus Market Prices

1.28 The production and income approach measures the domestic product
as the cost paid to the factors of production and is known as domestic product
at factor cost. However, the various forms of final output when considered
from the point of expenditure are valued at market prices i.e., the actual price
which either the consumers or producers pay for purchase of goods and
services whether for consumption or for investment. This measurement is
called the expenditure at market prices. When valued in this way this
measure will be different from the product or income measure at factor cost.
The market value of the goods and services will include the indirect taxes like
excise duties, customs, sales tax etc., levied by the government on goods and
services. Similarly, the price paid by the consumer will not include any
subsidy which the government pays to the producer. Hence, the market value
of final expenditure would exceed the total obtained at factor cost by the
amount of indirect taxes reduced by the value of subsidies. Domestic or
national product can, therefore, be measured either at market prices or at
factor cost one differing from the other by the amount of net indirect taxes
(indirect taxes less subsidies).

1.29 Indirect taxes are taxes assessed in respect of production, sale,
purchase or use of goods and services of producers which they charge to the
expenses. The main taxes in this category are excise duties, Value added
tax, sales tax, import and export duties, entertainment tax etc. Their effect is
to make the prices paid in a transaction higher from the actual receipts of the
factor of production involved. Direct taxes do not have the same effect since
they do not impinge directly on transaction but are levied directly on the
income. Indirect taxes are, therefore, added to obtain estimates at market
price from that at factor cost.

1.30 Subsidies include all grants on current account which industries
recover from the government. As a matter of long-standing convention,
subsidies are regarded as payments necessary to elicit factor services.
Accordingly they are included in the sum of factor incomes. They must,
therefore, be subtracted if the estimates are required at market prices.
[Reproduced from CSO Publication]