Factor Cost(FC) and Market Price(MP)
Factor cost refers to the actual cost of the various factors of production and it includes government grants and subsidies but it excludes indirect taxes. Whereas market price refers to the actual transacted price and it includes indirect taxes- custom duty, excise duty, sales tax, service tax etc.
In a particular year, GDP(FC) is Rs. 100. In the same year Indirect Taxes are Rs. 20 while the subsidies are Rs. 25. So, we can arrive at GDP(MP) using the following equation:
GDP(FC) = GDP(MP) -Indirect Taxes + Subsidies
Rs. 100 = GDP(MP) – Rs. 20 + Rs. 25
So,
GDP (MP) = Rs. 100 + Rs. 20- Rs. 25 = Rs. 95