Q.Explain the difference between National Income at Market Price and National Income at Factor Cost.

The two measures differ only in how they treat government taxes and subsidies on goods and services.

National Income at Market Price values output at the prices actually paid by the final buyer — the prices seen in the market, which include indirect taxes (such as GST) levied by the government and are reduced by any subsidies the government pays to keep certain prices low.

National Income at Factor Cost strips out this government wedge and measures what is actually earned by the owners of the factors of production — wages, rent, interest, and profit — for their contribution to production:

The distinction is not a minor technicality: because indirect tax collections (particularly GST) can rise or fall for reasons unconnected to how much producers actually earn, using market-price figures alone to judge how much income producers are receiving can be misleading; factor-cost figures are the ones more directly tied to factor incomes.

Students sometimes add indirect taxes instead of subtracting them when going from Market Price to Factor Cost — remember indirect taxes make market price higher than factor cost, so they must be deducted (and subsidies added back) to reach factor cost.