Q.What is National Income at factor cost ?

National income at factor cost values output by what the factors of production actually receive, i.e. rent, wages, interest and profit. It is obtained from national income at market price by subtracting indirect taxes and adding subsidies, so National Income at FC = National Income at MP minus net indirect taxes.

Meaning

Factor cost is the cost of all the factors of production used to produce goods and services, that is, the total of rent, wages, interest and profit paid to the factors. National income at factor cost is the national income measured in terms of these factor payments rather than the prices buyers pay in the market.

Relation to market price

Market price includes indirect taxes (such as GST or excise) charged by the government and excludes subsidies given by the government. Factor cost excludes indirect taxes and includes subsidies. Therefore:

National Income at Factor Cost = National Income at Market Price minus Indirect Taxes plus Subsidies

or, writing net indirect taxes = indirect taxes minus subsidies,

National Income at Factor Cost = National Income at Market Price minus Net Indirect Taxes

Significance

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