In national income accounting, Gross Domestic Product at factor cost is obtained by making which adjustment to GDP at market prices?

Introduction / Context:
This question belongs to national income accounting, a core area of macroeconomics and Indian economy. It asks how to derive Gross Domestic Product at factor cost from GDP at market prices. Understanding the difference between factor cost and market price and the role of indirect taxes and subsidies is essential for correctly interpreting official national income figures.

Given Data / Assumptions:

• We are given GDP at market prices as the starting point.
• We want to arrive at GDP at factor cost.
• Options involve adding or subtracting indirect taxes, subsidies, depreciation, and net factor income from abroad.

Concept / Approach:
Market price includes the effects of indirect taxes such as excise duty and GST and also reflects subsidies given on products. Factor cost represents the income received by factors of production, such as wages, rent, interest, and profit, before the effect of product related taxes and subsidies. Therefore, to go from market price to factor cost, we remove indirect taxes and add subsidies. Net factor income from abroad and depreciation relate to converting between domestic and national aggregates or between gross and net values, not between factor cost and market price.

Step-by-Step Solution:
Step 1: Recall the basic relationship: GDP at market prices equals GDP at factor cost plus indirect taxes minus subsidies.Step 2: Rearrange this relationship to express GDP at factor cost in terms of GDP at market prices.Step 3: This gives GDP at factor cost equals GDP at market prices minus indirect taxes plus subsidies.Step 4: Compare this expression with the options provided.Step 5: The option that matches this adjustment is GDP minus indirect taxes plus subsidies.

Verification / Alternative check:
You can verify by using a simple numerical example. Suppose GDP at market prices is 1000 units, indirect taxes are 100 units, and subsidies are 20 units. Then GDP at factor cost equals 1000 minus 100 plus 20, which is 920 units. If you add back the indirect taxes and subtract subsidies, you would move in the opposite direction, from factor cost to market prices. This confirms the correct direction of adjustment.

Why Other Options Are Wrong:
GNP minus depreciation allowances gives net national product at market price, not GDP at factor cost. NNP plus depreciation allowances gives gross national product, not the domestic aggregate at factor cost. GDP minus subsidies plus indirect taxes reverses the correct signs and would move from factor cost to market prices, not the other way round. GNP minus net factor income from abroad gives GDP, but this calculation deals with domestic versus national concepts, not factor cost versus market price.

Common Pitfalls:
A common mistake is to memorise formulas mechanically and then confuse the direction of adjustments. Students often forget whether to add or subtract taxes and subsidies when converting between factor cost and market price. A helpful rule is to remember that factor cost is closer to the income received by factors, so you must strip away product taxes and add back subsidies. Writing a small chain of equalities from GDP at factor cost to GDP at market prices and then reversing it during revision can prevent errors in the exam.

Final Answer:
GDP at factor cost is obtained from GDP at market prices by subtracting indirect taxes and adding subsidies, that is, GDP minus indirect taxes plus subsidies.