I am a student and I am having an argument with my macroeconomics professor who says that variables at factor cost(or true factor cost as he calls it) do not contain subsidies whereas I think otherwise. My argument is based on a very simple example which is that is a farmer sells sugarcane to sugar manufacturers at a subsidized price then the factor cost of sugar will contain the subsidy on sugarcane. But my professor says that the factor cost of sugar will take the true factor cost of sugarcane and not the subsidized one. I would be grateful if you all could give me your stand on this question.
This is how it was asked in my exam as a true/false question "Variables at factor cost do not contain subsidies" Correct answer according to my professor - TRUE
You may wish to string together a series of boxes from the beginning to end of supplying a good or service. You may see that some boxes are oriented to one or another advantage in terms of the market. That the subsidy you speak of is not a concern of the sugar manufacturer may be what your prof is trying to get across to you. As you examine the grower you see that he is being kept in business by contributions from two sources: his purchaser and his government. Together they may be covering the producer's costs. If not his land value will contract as time passes since it is not "productive" and has no "premium". Thus sugarcane prices remain in a supply/demand market relationship. They are kept low by oversupply and farmer subsidies allow the land to continue to be productive by external government support to the farmer. One of the fun things about what you are studying is the discovery of where money is made. Most al strings of boxes begin with the buyer at advantage. That switches along the way to the ultimate consumer. Could it have been any other way? No, probably not because then there would have to be a box with no advantage which can't happen. What you may be learning is how to focus on marginal analysis of the one box in the string that has two advantages. This is the box used by successful traders where they throughput as the advantage shifts from input to output via the timing mechanism of always operating from the minority advantage point. When I was on campus I had the neat opportunity of being on a faculty segment that was independent of their salaries. This was by virtue of their common knowledge, skills and experience of trading the markets. It was kind of a fun place to be an graduate instructor. Always the trading conversations (short term position trading) infused into the daily routine of teaching. I noticed in when I lived in Switerland, farmers were not subsidized. They were mostly millionaires and just keep farming as a vocation carried down from generation to generation.