GDP at Factor Cost = GDP at Market Price minus indirect taxes plus subsidies

GDP (Gross Domestic Product) is a measure of the total value of goods and services produced within a country's borders during a specific time period. It can be calculated at market prices or at factor cost.

GDP at Market Price is the total value of goods and services produced in a country during a specific time period, including the value of indirect taxes. Indirect taxes are taxes levied on the production and sale of goods and services, such as sales tax or value-added tax (VAT). These taxes are included in the market prices of goods and services.

GDP at Factor Cost, on the other hand, is the total value of goods and services produced in a country during a specific time period, excluding the value of indirect taxes but including subsidies.

Subsidies
Subsidies are financial assistance provided by the government to businesses or individuals to support certain activities or sectors of the economy. They are usually provided to promote economic growth, encourage investment, or support specific industries. Subsidies can be given in the form of direct payments, tax breaks, or reduced prices for goods and services.

When calculating GDP at Factor Cost, subsidies are added to GDP at Market Price because they represent a benefit or support to businesses or individuals that is not included in the market prices. By adding subsidies, we remove the impact of government support and focus on the actual value of goods and services produced.

Example:
Let's consider an example to understand the concept better. Suppose a country's GDP at Market Price is $100 billion, and the government provides $10 billion in subsidies to certain industries. In this case, the GDP at Factor Cost would be $110 billion ($100 billion + $10 billion).

By adding subsidies to GDP at Market Price, we get a more accurate measure of the actual value of goods and services produced in the country, excluding the impact of government support. This helps in analyzing the true productivity and economic performance of the country.

In conclusion, GDP at Factor Cost is calculated by subtracting indirect taxes and adding subsidies to GDP at Market Price. Subsidies are added to account for the financial assistance provided by the government, which is not included in the market prices of goods and services.