Answer to Question #88478 in Macroeconomics for Nahusenay

Question

Why the national income is measured at factor prices and not at market prices?

Answer 1

National income is the total value a country’s final output of all new goods and services produced in one year. This relationship is expressed in the national income identity, where the amount received as national income is identical to the amount spent as national expenditure, which is also identical to what is produced as national output.

The problem with market price is that market price is determined by net effect of Indirect Taxes and Subsidies, and both Indirect Taxes and Subsidies are kind of transfer payments and not factor payments, and these are made by the govt and not by the factors of production.

So Market Price does not show the actual contribution of the factors of production in the value of goods and services produced.

But when income is determined as sum of factor payments made, it exactly shows the actual contribution by different factors in production of goods and services, and hence presents a more fair picture of actual productive activities in the economy.