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 – NIT |
| Concepts 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 + NIT |
See the following cases
Case- 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.