Let us start with very basic definition of GDP, Monetary value of Goods and services produced in an economy within economic territory. Say only 5 kurkure are made in economy (Consider in 2014), Value of 5 kurkure i.e rs 100 will be our GDP.
Constant Vs Current Price:
In 2015, Price of Kukure comes out 105 i.e 21*5. Let us consider this 1 rs increase as inflation. Now GDP at current price will be 105 , but GDP at constant price will be 100, i.e adjusted for inflation.
Constant series tells true scenario of growth in economy, i.e adjusting effect of inflation. Where as
Current series is influenced by effect of inflation.
Factor Cost Vs Market Price:
Next is difference between Factor cost and Market price,
Suppose value of Kurkure at “factory gate” is 17 rs and till it reach retail shop in market, Tax is added and subsidies are subtracted to it’s price . Say 17 + 3 (Excise) – 0 (Subsidies) = RS 20.
In market price we have Taxes added and Subsidies deducted to the factor cost.
GDP @ factor cost @ constant price in our example will be RS 17 (Price of kurkure at factory gate) * 5 = rs 85.
Value Of GDP @ Constant price @ market price i.e GDP @ Constant market price in our example will be = 20 * 5 = Rs100.
Till now India’s GDP was calculated at factor cost as Indian market price can be regulated by govt. to large extent(Say higher subsidies, taxes etc). But recently after govt notification, it is calculated at market price, which is to bring India on par with global GDP calculation standards.