Basic Price

Basic price, in the field of economics and national income accounting, provides accuracy in measurement. The government, economists, policymakers, and researchers depend on the understanding of the pricing concepts to analyze the economic performances. Basic price is a simple yet significant concept to determine the value of goods and services produced in an economy. 

 

What is the meaning of Basic Price?

Basic price is the price of any goods or service that excludes taxes but includes subsidies that may have been provided by the government. It is the price received by the producer for the product or service at the time of production before any taxes or subsidies are added. For example, when the government provides a subsidy of INR 5000 for each washing machine sold, and the production price is INR 10,000, the basic price of the washing machine would be INR 15,000 (INR 10,000 + 5,000 subsidy) 

The key features of the basic price includes: 

• Includes the subsidy but not taxes: The basic price includes the subsidies provided to producers. The taxes on the goods and services are excluded. 

• Producer revenue: The price received by the producer for the goods or services in the market before the imposition of any taxes or subsidies 

• Provides economic analysis: The basic price offers an economic analysis which is used for national accounting. It helps in the calculation of GDP using the production method. 

 

Click here for the breakdown on the topic Market Price vs Factor Cost vs Basic Price

 

Formula for Basic Price Calculation

The basic price is the amount received by the producer for goods or services which excludes the services but includes the subsidies. To determine the basic price, subtract the indirect taxes from the market price and add the subsidies. 

 

Basic Price = Market Price - Indirect Taxes + Subsidies

 

How is the Basic Price used in National Income Accounts?

The national income accounting, the output and income are valued in three main ways which are basic price, producer price, and market price. Each of these methods reflect different methods of the economic transaction which are used for analytical purposes. While calculating the GDP at basic price, the total value added by all the industries is aggregated. 

• The basic price shows the value that is received by the producers with the total of taxes including the subsidies 
• The producer price or factor cost includes the taxes but excludes the subsidies 
• The market price is the amount paid by the consumers to buy goods or services

 

Significance of the Basic Price 

The basic price is important in accurate economic measurement. It offers a clear and consistent picture amidst complexities and varying tax regimes. Understanding the basic price provides the economists and policymakers with better access to the genuine contributions of different sectors and producers leading to the informed decisions.

 

The significance of the Basic Price is listed below: 

• The basic price reflects the true earnings of the producers from their output- no more, no less. 
• Gross value added or GVA which is GDP plus the subsidies on a product is calculated with the basic price 
• Economists or statisticians prefer the basic price method for the calculations
• The basic prices reflects the actual valuation of production activity 
• The basic price is not influenced by the policy-related charges 
• It isolates the producer’s contribution to the economy allowing a more accurate calculation
• It provides a clear picture of industrial performance 
• The cross-country comparisons are determined with the basic prices. 
• Institutions like IMF, world bank, and the UN analyze the development metrics and provide economic recommendations 

 

Explore More 

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Frequently Asked Questions (FAQs) 

What is the reason for choosing the basic price for measuring national income accounts?

The basic price reflects the actual revenue received by the producers which is independent of government imposed taxes and subsidies. It provides a neutral valuation focusing amilny on producer's contribution. 

Is basic price and selling price of a product similar?

That is not necessary. The selling price or market price is what a consumer pays which includes indirect taxes. The basic price does not include all these taxes. 

What is the impact of basic price on GDP and GVA calculations?

Gross value added or GVA which is GDP plus the subsidies on a product is calculated with the basic price. The result is not distorted by taxes or subsidies.