Q.What do you mean by 'market price' and 'factor cost' in national income accounting? Show how National Income at Factor Cost is derived from GDP at Market Price.

Market price is what the buyer pays (net indirect taxes included); factor cost is what the producer actually receives, after removing that tax/subsidy adjustment.

Market Price (MP) is the price a buyer actually pays for a good or service — it already includes any indirect tax (like GST) the government levies, and already reflects any subsidy the government grants, since a subsidy lowers the price paid.

Factor Cost (FC) is the amount actually received by the producer for the factors of production employed to make that good or service — it is the market price with the government's tax/subsidy wedge removed.

To move from GDP at Market Price to National Income (which, by definition, is NNP at Factor Cost), three adjustments are needed:

1. Add NFIA to move from the domestic to the national concept: $GNP_{MP} = GDP_{MP} + NFIA$
2. Deduct Depreciation to move from gross to net: $NNP_{MP} = GNP_{MP} - \text{Depreciation}$
3. Deduct Net Indirect Taxes to move from market price to factor cost: $NNP_{FC} = NNP_{MP} - NIT$