Gross domestic product at factor cost

Updated: Aug 20, 2021

In measuring gross domestic product, market prices are used to value outputs so that they can be aggregated. This implies that, to the extent that market prices include indirect taxes, i.e. purchase tax, and subsidies, the value of output will not equal the value of incomes paid out to factors of production. This is because it is the revenue received by firms after indirect taxes which is distributed as factor incomes. Thus, by subtracting the total of indirect taxes (and, since subsidies have the opposite effect of taxes, by adding in subsidies) from the G.D.P. we arrive at the estimate of the G.D.P. at factor cost, which is consistent with the value of incomes paid to factors of production.

Reference: The Penguin Dictionary og Economics, 3rd edt.

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