When calculating the national product at factor cost, indirect taxes are costs that raise the value and are thus deducted, whereas subsidies lower the value of the good and are therefore added to determine the genuine value.
The government's provision of subsidies to businesses decreases the cost of production factors and thus lowers market prices. As a result, the cost factor is increased in order to determine the actual cost of product subsidies.
GNP less depreciation, indirect taxes, and subsidies equals national income. Subsidies are added because factors receive them, while indirect taxes are eliminated since they do not contribute to factor income.
Because subsidies offset the factor cost or bring down both the market price and the factor cost, subsidies are reduced. Taxes go up because they are costs that drive up prices, but subsidies go down because they cover factor costs or drive down both market prices and factor costs.
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