Which one is better:GDP at Factor Cost or Market Price?

GDP at Factor Cost or Market Price: which one is better?



Let us first understand GDP.

## GDP (Gross Domestic Product)

“The total value of all goods & services produced within the geographic boundary  of a country in a specified time period is GDP”.

For production of goods & services, we require 4 factors of production:
1. Land (or rent, building, etc)

2. Labour

3. Capital

4. Entrepreneur

The cost of production = cost of these 4 factors of production = Factor Cost

So, GDP at Factor Cost = total value of goods & services produced at factor cost in a geographic boundary of a country.

Market Price= price of goods & services at market place.

Market Price 》Factor Cost

because govt. levies indirect taxes (though it gives certain subsidies as well but they are less than the taxes).

Therefore,

Market Price (of product/service) = Factor Cost + Indirect Taxes – Subsidies

i.e. Market Price = Factor Cost + Net Taxes 

(as Taxes > Subsidies)

So, GDP at Market Price will also be greater than GDP calculated at Factor Cost.

## Which one is better?

In an economy if Indirect Taxes are raised then GDP calculated at Market Price would also rise but there would not be any new goods & services produced.

Due to above reason GDP at Factor cost is better as it indicates the goods & services produced better than GDP at Market Price.

With Great Love,

Er. Amit Yadav

http://www.stayfoolish.in

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s