The net domestic product (NDP) equals the
gross domestic product
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...
(GDP) minus
depreciation
In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...
on a country's
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used fo ...
goods.
Net domestic product accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration. The depreciation accounted for is often referred to as "
capital consumption allowance" and represents the amount of capital that would be needed to replace those depreciated assets. The portion of
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
spending that is used to replace worn out and obsolete equipment — depreciation — while essential for maintaining the level of output, does not increase the economy’s capacities in any way. If GDP were to grow simply as a result of the fact that more money was being spent to maintain the capital stock because of increased depreciation, it would not mean that anyone had been made better off.
[Spant, R. (2003). Why net domestic product should replace gross domestic product as a measure of economic growth. ''International Productivity Monitor'', 39-43.] Because of this some economists view NDP as a better measure of social and economic well being than GDP.
[England, R. W. (1998). Measurement of social well-being: alternatives to gross domestic product. ''Ecological Economics'', ''25''(1), 89-103.]
If the country is not able to replace the capital stock lost through depreciation, then GDP will fall. In addition, a growing gap between GDP and NDP indicates increasing obsolescence of capital goods, while a narrowing gap means that the condition of capital
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a compan ...
in the country is improving. It reduces the value of capital that is why it is separated from GDP to get NDP.
See also
*
Net national product
*
Gross Domestic Product
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...
*
National Income Accounting
References
{{DEFAULTSORT:Net Domestic Product
Gross domestic product