Subsidies & National Income

Subsidies & National Income
Similar to the indirect taxes, the various subsidies which are forwarded by the governments need to
be adjusted while calculating national income. They are added to the national income at market cost,
in case of India9. Subsidies are added in the national income at the market cost to derive the national
income at factor cost . This is because the price at which the subsidised goods and services are made
available by the governments are not their real factor costs (subsidies are forwarded on the factor
costs of the goods and services) otherwise we will have a distorted value (which will be less than its
real value!). Thus the formula will be:
National Income at Factor Cost = NNP at Market Cost + Subsidies
If the national income is derived at the market cost and governments forward no subsidies there is no
need to adjustments for the subsidies – but after all there is not a single economy in the world today
which does not forward subsidies in one or the other form.
Putting ‘indirect taxes’ and the ‘subsidies’ both together India’s National Income will be derived with
the following formula (as India does it at the factor cost):
National Income at Factor Cost = NNP at Market Cost – Indirect Taxes + Subsidies