Understanding GDP at Market Prices and GDP at Factor Cost
We suppose that in a particular year, GDP(FC) is Rs. 100. In the same year Indirect Taxes are Rs. 20 while the subsidies are Rs. 25. So, we can arrive at GDP(MP) using the following equation:
GDP(FC) = GDP(MP) -Indirect Taxes + Subsidies
Rs. 100 = GDP(MP) – Rs. 20 + Rs. 25
So, GDP (MP) = Rs. 100 + Rs. 20- Rs. 25 = Rs. 95
If the Government tries to raise the subsidies, the Difference between the
GDP(FC) and GDP(FC) will increase. The same is opposite for Indirect taxes.
The Question is, if the Economic Survey says that Economy has grown by 8.6 % in this year, what does it indicate? Is it GDP at market prices or GDP at Factor Cost?
The Answer is GDP at Factor Cost. The reason is simple because it takes into consideration, the other things such as Indirect taxes, Subsidies etc. which may affect the data.