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Change in valuation from Factor Cost to Basic Prices

Since its inception, GDP by industry has been measured at factor cost. This measure differs from the more prevalent market price measure found in the income and expenditure accounts by its exclusion of taxes on production (formerly called indirect taxes) and the inclusion of subsidies. While the market price measure represents the value of GDP as paid for by final consumers, the factor cost measure, more appropriately in the case of industrial production, takes the point of view of producers.

With this revision, value added will no longer be measured at factor cost, but instead at basic prices. This new measure adds to the factor cost measure some taxes on production (such as property and payroll taxes, but not federal or provincial sales taxes), and subtracts some subsidies (such as labour-related subsidies, but not product-related subsidies). The end result is that the new basic prices measure of GDP stands somewhere in between the lower and upper bounds defined by the factor cost and market price measures, respectively (see table).

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GDP at factor cost excludes all taxes on production and includes all subsidies whether they are on intermediate inputs or labour and capital. In the basic price approach only taxes and subsidies on intermediate inputs are treated in this manner. Payroll taxes are payments to government arising out of the input of labour services, and property taxes are levies on the capital services of buildings and other property. They are both part of production and are included in the basic price measure. On the other hand, subsidies to labour and capital are deducted from the gross revenues of these factors as they are payments by governments rather than earnings.

By calculating GDP by industry at basic prices, Statistics Canada makes its estimates of economic activity more comparable to those produced by a majority of other OECD countries.

The difference between the three measures can be illustrated using data from the 1997 Input-Output tables in constant prices for total GDP.