Different Types of Prices in National Income Accounting

Factor Cost
Factor Cost consists of the price paid to factors of production. In other terms, factor cost consists of income earned by a factor of production that is used in the production process. In general, the amount paid in the form of wages and salaries, rent, interest, and profit is known as factor cost. While calculating GDP at factor cost the value of depreciation is also included.

Factor Cost=Wages+Rent+Interest+Profit+Depreciation

Basic Price
If production taxation is added to factor cost and production subsidies are deduced from factor cost then the resulting amount is called basic price. Here production taxes (stamp duties etc) and subsidies (subsidies due to production of goods like fertilizer etc) are independent of the volume of output. If the government imposes any tax or provides any subsidies based on production only, irrespective of quantity then it is known as production tax or production subsidy respectively.

Therefore the basic price is the amount receivable by the producer inclusive of production tax and subsidies and exclusive of taxes payable and subsidies receivable on products or per unit tax and per unit subsidies. In the case of imported products production tax may be the c.i.f. (cost, insurance, and freight) value, that is, the value at the border of the importing country.

Basic Price=Factor Cost+Production Tax-Production Subsidies

Producer price
The producer price is the amount receivable by the producer inclusive of taxes on products except deductible value-added tax and exclusive subsidies on products. It means if the product tax and subsidies are added and deducted to and from the basic price then the resulting amount is the producer’s price. The equivalent for imported products is the c.i.f value plus any import duties or other taxes on imports (minus any subsidies on imports).

Producer prices = Basic Prices + Taxes on Products (Excluding VAT) – Subsidies on Products

Purchaser price
The purchaser’s price is the amount payable by the purchaser. This includes trade margins realized by wholesalers and retailers (by definition, their output) as well as transport margins (that is, any transport charges paid separately by the purchaser) and non-deductible VAT. Purchasers’ price may be known as market price also.

Purchaser prices = Producer Prices + Taxes+ Non-deductible VAT+Trade and Transport Margins – Subsidies on Products

The measure of national income at basic price is less than that of market price by the amount of tax minus subsidies (net indirect tax). So there may be confusion on which price is better to represent the size of the economy. Looking at standard institutions like the World Bank, the IMF, ADB, they report the amount of GDP at market price or at the price including taxation for the international comparison. Thus, it is better to report the measurement at market price to be compared internationally. However, if one wants to measure the GDP focusing on the production approach then it is better to use at factor cost or cost excluding taxation.

Factor Cost=Wage+Rent+Interest+Profit+Depreciation
Basic Price=Factor Cost+Production Tax-Production Subsidies
Producers Price=Basic Price+Product Tax-Product Subsidies
Purchasers Price=Producers price+Product tax+Non-deductable VAT+Trade and Transport Margin-Product Subsidies

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