Difference between GDP at market price and GDP at factor price?

There is one important difference that arises when calculating the level of GDP from the spending side of the economy rather than summing the values added in production. This difference arises because the price paid by consumers for many goods and services is not the same as the sales revenue received by the producer. There are taxes that have to be paid, which place a wedge between what consumers pay and producers receive.

Taxes attached to the transactions are known as indirect taxes. Thus, if a consumer pays 100 for a meal in a restaurant the owner may receive only 86, the remaining 14 will go to the government in the form of VAT. The term factor cost or basic price is used in the national accounts to refer to the prices of products as received by producers. Market prices are the prices as paid by consumers.

 

Thus, factor cost or basic prices are equal to market prices minus taxes on products plus subsidies on products.

 

source: wiki.answers

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One thought on “Difference between GDP at market price and GDP at factor price?

  1. sherryjuly13 November 24, 2014 at 11:12 PM Reply

    wow, this post actually simplified the whole concept for me! thanks! I was having a hard time understanding the two concepts and was often getting confused between the two…

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