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Table 2.3: Distributions of factor incomes of firms A and B Firm A Firm B Wages 20 60 Profits 30 90 Recall that GDP by income method = sum total of factor incomes, which is equal to total wages received (workers of A and B) and total profits earned (by A and B), which is equal to 80 + 120 = 200. 2.2.4 Factor Cost, Basic Prices and Market Prices In India, the most highlighted measure of national income has been the GDP at factor cost. The Central Statistics Office (CSO) of the Government of India has been reporting the GDP at factor cost and at market prices. In its revision in January 2015 the CSO replaced GDP at factor cost with the GVA at basic prices, and the GDP at market prices, which is now called only GDP, is now the most highlighted measure. The idea of GVA has already been discussed: it is the value of total output produced in the economy less the value of intermediate consumption (the output whichisusedinproductionofoutputfurther, and not used in final consumption). Here we discuss the concept of basic prices. The distinction between factor cost, basicpricesandmarketpricesisbasedonthedistinctionbetweennetproduction taxes(productiontaxeslessproductionsubsidies)andnetproducttaxes(product taxes less product subsidies). Production taxes and subsidies are paid or received in relation to production and are independent of the volume of production such as land revenues, stamp and registration fee. Product taxes and subsidies, on the other hand, are paid or received per unit or product, e.g., excise tax, service tax, export and import duties etc. Factor cost includes only the payment to factors 24 of production, it does not include any tax. In order to arrive at the market prices, s we have to add to the factor cost the total indirect taxes less total subsidies. The i basic prices lie in between: they include the production taxes (less production o c subsidies) but not product taxes (less product subsidies). Therefore in order to r arrive at market prices we have to add product taxes (less product subsidies) to a the basic prices. M As stated above, now the CSO releases GVA at basic prices. Thus, it includes o u the net production taxes but not net product taxes. In order to arrive at the GDP o (at market prices) we need to add net product taxes to GVA at basic prices. n Thus, I GVA at factor costs + Net production taxes = GVA at basic prices GVA at basic prices + Net product taxes = GVA at market prices Table 2.5 at the end of the chapter gives the figures for GDP (at market prices) and GVA at basic prices, while Table 2.6 gives the composition of GDP from expenditure side. 4In this example, we have left out factor payments in the form of rent and interest. But this will not make any difference to the basic result, because after paying wages the remainder of value added by a firm will be distributed between rent, interest and profits (together called operating surplus). Reprint 2026-27