Net Domestic Product

What is Net Domestic Product?

The Net Domestic Product (NDP) is a key indicator of the economic growth of a country. Net Domestic Product (NDP) refers to the net monetary value of all commodities and services produced within the national borders of a country in a given period of time. In other words, NDP is the measure of net economic output in a year for a country. It is calculated by subtracting depreciation from the Gross Domestic Product (GDP).

The depreciation in the calculation of NDP refers to the depreciation of capital assets, such as machinery, housing, and vehicles. The total value of depreciation, therefore, must be calculated in order to calculate the value of the Net Domestic Product.

The NDP also takes into account other factors, such as obsolescence and the entire destruction of the assets. The depreciation of assets is also called capital consumption allowance in the case of the calculation of the Net Domestic Product.

When a country fails to replace the capital stocks that lose their value through depreciation, then the value of the GDP of the country goes down.

A small gap between the GDP and NDP is considered good for the health of an Economy

• A narrow gap between NDP and GDP shows a better balance of economy because the value of depreciation must be low to make the gap between GDP and NDP narrower. A low depreciation value indicates that fewer of the assets turn obsolete which is a good sign for the economy.

• A growing gap between the NDP and GDP means an increased value of obsolescence. This increase along with the deterioration of the capital stock usually indicates stagnation of the economy.

• The NDP is generally considered to be a better measure of the economic condition of a country because it considers the depreciation of capital assets. This also implies the well-being of a nation.

How Net Domestic Product (NDP) works

Net Domestic Product (NDP) tackles into account the capital that has been used for housing, machinery, and vehicle deterioration. This form of depreciation, as mentioned above, is known as capital consumption allowance. The capital consumption allowance shows the capital needed for replacing the depreciated assets.

$$\mathrm{NDP\:=\:GDP\:-\:Depreciation}$$

The nature and scope of replacement of depreciated assets vary and depend on the type of the assets.

For example, machines that are used in a factory may need regular replacement of spare parts. This replacement of spare parts may continue until the entire machine becomes unusable. This may take many years, but excluding unexpected damages or defects, there is usually a cycle of failure and replacement of equipment.

Therefore, while a part of the machine becomes unusable, another similar part of the machine may still be in good condition and running well in the factory. The inclusion of new machinery therefore would be considered in the measurement of depreciation and in the calculation of the NDP.

The above-mentioned situation, however, differs from factory expansion. The installation of completely new machinery in a new factory is not considered a replacement because it results in the productivity of the firm. The demand for new machinery in this case was driven by the need to increase production. Therefore, the need for new machinery, in this case, cannot be considered a replacement. This means that the new machinery would mean a gain for the NDP.

Another example of depreciation can be found in the case of the housing sector. The reconstruction of old buildings in a city would need additional money to rebuild the houses which can be considered to be the re-creation of damaged capital assets and therefore must be considered a depreciation.

However, new buildings that have been constructed and not used or re-built add to the production line of the real estate property in the city. The new buildings, therefore, do not contribute to the value of depreciation while the repair of old buildings does to the NDP.

Notable Considerations

NDP is one of the key measures of the economic growth of a nation. Other measures that include the economic growth patterns of a country are gross national income (GNI), GDP, disposable income, and personal income.

Although GDP is a popular measure to show the economic health of a country, NDP takes into account the depreciation of capital assets and hence is a better indicator of the condition of an economy. It shows the rate of degradation of capital assets and hence, the required rate of replacement of such assets.

Key Takeaways

• Net domestic product is a measure of the yearly economic output of a nation.

• The NDP is adjusted for the depreciation of the capital assets.

• The Net Domestic Product is calculated by subtracting depreciation from the Gross domestic product.

• The NDP also takes into account other factors, such as obsolescence and the entire destruction of the assets.

• The depreciation of assets is also called capital consumption allowance in the case of the calculation of the Net Domestic Product.

• When a country fails to replace the capital stocks that lose their value through depreciation, then the value of the GDP of the country goes down.

• A narrow gap between NDP and GDP shows a better balance of economy because the value of depreciation must be low to make the gap between GDP and NDP narrower.

• A low depreciation value indicates that fewer of the assets turn obsolete which is a good sign for the economy.

• A growing gap between the NDP and GDP means an increased value of obsolescence. This increase along with the deterioration of the capital stock usually indicates stagnation of the economy.

• The nature and scope of replacement of depreciated assets vary and depend on the type of the assets.

• The NDP is generally considered to be a better measure of the economic condition of a country because it considers the depreciation of capital assets. This also implies the well-being of a nation.

• NDP is one of the key measures of the economic growth of a nation. Other measures that include the economic growth patterns of a country are gross national income (GNI), GDP, disposable income, and personal income.

Conclusion

The NDP is a key indicator of the growth of an economy and hence it is an important measure to keep an eye on. Moreover, as NDP takes into account the depreciation of capital assets, it is considered to be better than GDP in indicating the true status of an economy. That is why it must be understood by one and all.

FAQs

Qns 1. What is meant by NDP? How is it calculated? Discuss briefly.

Ans. The net domestic product (NDP) is a key indicator of the economic growth of a country. It refers to the net monetary value of all commodities and services produced within the national borders of a country in a given period of time. In other words, NDP is the measure of net economic output in a year for a country. It is calculated by subtracting depreciation from the Gross Domestic Product (GDP).

Qns 2. What is the formula for Net Domestic Product?

Ans.

$$\mathrm{NDP\:=\:GDP\:-\:Depreciation}$$

Qns 3. What are the other measures than NDP that show the growth of an economy?

Ans. Other measures that include the economic growth patterns of a country are gross national income (GNI), GDP, disposable income, and personal income.