The Difference Between National Income At Market Price And National Income At Factor Cost Is

national income is the total income earned by all the factors of production within a country during a particular period of time. It includes all the income generated by labor, capital, and land. However, there are two different ways of calculating national income: national income at market price and national income at factor cost.

National income at market price is the total value of all final goods and services produced within a country during a particular period of time. It includes indirect taxes such as Value Added Tax (VAT) and trade subsidies which are added to the value of final goods and services in order to arrive at the market price.

On the other hand, national income at factor cost is the income received by the factors of production for their contribution towards the production of goods and services. It includes only the actual payment made to labor, capital, and land excluding any indirect taxes or subsidies.

The difference between these two measures of national income is the indirect taxes and subsidies.

Indirect taxes such as VAT, excise duties, etc., are taxes that are paid by the consumer while purchasing goods and services. These taxes are included in the final price of the product and increase the market price of goods and services. Since they are not a part of the income received by the factors of production, they are deducted from the market price of goods and services to arrive at the factor cost.

For example, if a good is sold for $100 and the rate of VAT on this good is 10%, then the price inclusive of VAT would be $110. However, the income received by the factor of production for producing this good is only $100. Therefore, to arrive at national income at factor cost, we need to deduct the indirect taxes which are equal to $10.

Similarly, subsidies are financial incentives given by the government to encourage the production of goods and services. They reduce the production cost of goods and services and hence, reduce their market price. Since they are not a part of the market price of goods and services, they are added to the factor cost to arrive at the market price.

For example, if a good is sold for $100 and the government provides a subsidy of $10 for its production, then the cost of production of this good would be only $90. However, the income received by the factor of production for producing this good is still $100. Therefore, to arrive at national income at market price, we need to add the subsidy which is equal to $10.

The difference between the national income at market price and national income at factor cost is important because it reflects the real income earned by the factors of production. National income at factor cost shows the actual income received by the factors of production for their contribution towards the production of goods and services.

On the other hand, national income at market price includes indirect taxes and subsidies which are not a part of the income received by the factors of production. Therefore, the actual income earned by the factors of production is lower than the income calculated at market price.

In addition, the difference between national income at market price and national income at factor cost also reflects the level of indirect taxes and subsidies in the economy. If the difference between the two measures is significant, it means that the economy has high levels of indirect taxes or subsidies.

Furthermore, the difference between the two measures also affects the distribution of national income. National income at market price is generally higher than national income at factor cost. This means that a larger proportion of the national income goes to the government in the form of indirect taxes and subsidies. Therefore, national income at factor cost is often preferred by economists and policymakers for analyzing the distribution of national income.

In conclusion, the difference between national income at market price and national income at factor cost is an important concept in economics. It reflects the actual income earned by the factors of production and the level of indirect taxes and subsidies in the economy. National income at factor cost is often preferred by economists and policymakers for analyzing the distribution of national income.