<p>The best practice would be to use definitions from recognized international institutions such as the World Bank or the Organisation for Economic Co-operation and Development (OECD). In <a href="http://www.oecd.org/sdd/na/2681470.pdf" rel="nofollow noreferrer">this document</a> The OECD classifies three types of gross value added (1) at  basic  prices, (2) at producers' prices and (3) <strong>at factor cost</strong>. </p>

<p>Let first define gross value added at  basic  prices  as  output  valued  at  basic  prices  less  intermediate consumption valued at purchasers' prices. Then, gross  value  added at  factor  cost  can  be  derived  from  gross  value  added  at  basic  prices  by subtracting other taxes less subsidies on production. </p>

<p>As an example, GDP  at  market  prices  for  the  United  States  in  1992  was US\$ 6,234 billion.  As <strong>GDP at factor cost</strong> removes all net taxes on production, it would equal \$6,234 billion less \$506 billion or \$5,728 billion.</p>

<p>GDP at factor cost is thus a way of measuring gross value added at some prices. So, as far as I understand, it makes sense that depreciation get cancelled and finally becomes GDP (at factor cost) = Gross value added (at factor cost).</p>

<p>Why is depreciation added to Net value added? According to your source, if we deduct depreciation from Gross Net Product (at factor cost), we get Net National Product (at factor cost). So, if we add depreciation to NNP we get GNP.</p>

CC BY-SA 4.0
2019-08-17T07:50:39.627Z
2019-08-17T09:43:35.107Z
2019-08-17T09:43:35.107Z
emeryville
<p>GDP at factor cost= Net value added + Depreciation. Here my question is why depreciation added to Net value added? I am confused here: Net value added = Gross value added - depreciation; so the above formula becomes GDP at factor cost= Gross value added - depreciation + Depreciation. Here depreciation get cancelled and finally becomes GDP at factor cost= Gross value added.<img src="https://i.sstatic.net/1ydYm.jpg" alt="enter image description here">
Source: <a href="http://www.economicsdiscussion.net/national-income/components-national-income/top-17-components-of-national-income/18793" rel="nofollow noreferrer">http://www.economicsdiscussion.net/national-income/components-national-income/top-17-components-of-national-income/18793</a></p>

CC BY-SA 4.0
2019-08-17T07:48:13.973Z
Hi @Nandy, welcome! Where do your definitions come from?
emeryville
CC BY-SA 4.0
2019-08-17T08:04:28.067Z
http://www.economicsdiscussion.net/national-income/components-national-income/top-17-components-of-national-income/18793
Nandy
CC BY-SA 4.0
2019-08-17T08:05:25.220Z
It's in Component # 2. GDP at Factor Cost
Nandy
CC BY-SA 4.0
2019-08-17T08:25:10.867Z
ok, I edited my answer. Note that this source gives GDP at Factor Cost = GDP at Market Price – Indirect Taxes + Subsidies, which is consistent with my answer
emeryville
CC BY-SA 4.0
2019-08-17T08:36:01.460Z
If you found the answer helpful, please consider accepting it using the check-mark.
emeryville
CC BY-SA 4.0
2019-08-17T08:46:09.030Z
GDP at Factor Cost = GDP at Market Price – Indirect Taxes + Subsidies. I know this one. I have a doubt on this equation GDP at Factor Cost = Net value added + Depreciation.
Nandy
CC BY-SA 4.0
2019-08-17T09:44:41.333Z
Check the last two paragraphs of my answer. Then, the question is at what prices do you measure VA? It could be at factor cost, or market prices... – emeryville 27 mins ago
emeryville
<macroeconomics><gdp>
About gross domestic product at factor cost
Nandy
# About gross domestic product at factor cost

(Asked by: username_0 on 2019-08-17)

GDP at factor cost= Net value added + Depreciation. Here my question is why depreciation added to Net value added? I am confused here: Net value added = Gross value added - depreciation; so the above formula becomes GDP at factor cost= Gross value added - depreciation + Depreciation. Here depreciation get cancelled and finally becomes GDP at factor cost= Gross value added.![enter image description here](https://i.sstatic.net/1ydYm.jpg)
Source: <http://www.economicsdiscussion.net/national-income/components-national-income/top-17-components-of-national-income/18793>

**Tags:** macroeconomics, gdp

> **Comments:**
> **username_1**: Hi @username_0, welcome! Where do your definitions come from?  
> **username_0**: http://www.economicsdiscussion.net/national-income/components-national-income/top-17-components-of-national-income/18793  
> **username_0**: It's in Component # 2. GDP at Factor Cost  
> **username_1**: ok, I edited my answer. Note that this source gives GDP at Factor Cost = GDP at Market Price – Indirect Taxes + Subsidies, which is consistent with my answer  
> **username_1**: If you found the answer helpful, please consider accepting it using the check-mark.  
> **username_0**: GDP at Factor Cost = GDP at Market Price – Indirect Taxes + Subsidies. I know this one. I have a doubt on this equation GDP at Factor Cost = Net value added + Depreciation.  
> **username_1**: Check the last two paragraphs of my answer. Then, the question is at what prices do you measure VA? It could be at factor cost, or market prices... – username_1 27 mins ago  

---

## 1 answers

### Answer by username_1 on 2019-08-17. Score: 1

The best practice would be to use definitions from recognized international institutions such as the World Bank or the Organisation for Economic Co-operation and Development (OECD). In [this document](http://www.oecd.org/sdd/na/2681470.pdf) The OECD classifies three types of gross value added (1) at basic prices, (2) at producers' prices and (3) **at factor cost**.

Let first define gross value added at basic prices as output valued at basic prices less intermediate consumption valued at purchasers' prices. Then, gross value added at factor cost can be derived from gross value added at basic prices by subtracting other taxes less subsidies on production.

As an example, GDP at market prices for the United States in 1992 was US\$ 6,234 billion. As **GDP at factor cost** removes all net taxes on production, it would equal \$6,234 billion less \$506 billion or \$5,728 billion.

GDP at factor cost is thus a way of measuring gross value added at some prices. So, as far as I understand, it makes sense that depreciation get cancelled and finally becomes GDP (at factor cost) = Gross value added (at factor cost).

Why is depreciation added to Net value added? According to your source, if we deduct depreciation from Gross Net Product (at factor cost), we get Net National Product (at factor cost). So, if we add depreciation to NNP we get GNP.


---

