NDP
Net Domestic Product (NDP) is the GDP calculated after adjusting the weight of the value of
‘depreciation’. This is, basically, net form of the GDP, i.e. GDP minus the total value of the ‘wear
and tear’ (depreciation) that happened in the assets while the goods and services were being
produced. Every asset (except human beings) go for depreciation in the process of their uses, which
means they ‘wear and tear’. The governments of the economies decide and announce the rates by
which assets depreciate (done in India by the Ministry of Commerce and Industry) and a list is
published, which is used by the different sections of the economy to determine the real levels of
depreciations in different assets. For example, a residential house in India has a rate of 1 per cent per
annum depreciation, an electric fan has 10 per cent per annum, etc., calculated in terms of the asset’s
price. This is one way how depreciation is used in economics. The other way it is used in the
external sector while the domestic currency floats freely in front of the foreign currencies, If the value
of the domestic currency falls following market mechanism in front of a foreign currency, it is the
situation of ‘depreciation’ in the domestic currency, calculated in terms of loss in value of the
domestic currency.
Thus, NDP = GDP – Depreciation.
This way, NDP of an economy has to be always lower than its GDP for the same year, since there is
no way to cut the depreciation to zero. But mankind has achieved too much in this area by the
developments such as ‘ball-bearing’, ‘lubricants’, etc., all innovated to minimise the levels of
depreciation.
The different uses of the concept of NDP are as given below:
(a) For domestic use only – to understand the historical situation of the loss due to depreciation to
the economy. Also used to understand and analyse the sectoral situation of depreciation in
industry and trade in comparative periods.
(b) To show the achievements of the economy in the area of research and development which
have tried cutting the levels of depreciation in a historical time period.
However, NDP is not used in comparative economics, i.e., to compare the economies of the world.
Why this is so? This is due to different rates of depreciation which is set by the different economies
of the world. Rates of depreciation may be based on logic (as it is in the case of houses in India—the
cement, bricks, sand and iron rods which are used to build houses in India can sustain it for the
coming 100 years, thus the rate of depreciation is fixed at 1 per cent per annum). But it may not be
based on logic all the time - for example, upto Feb 2000 the rate of depreciation for the heavy
vehicles (vehicles with 6-wheels and above) was 20 per cent while it was done 40 per cent
afterwards - to boost the sales of the vehicles. There was no logic in doubling the rate! Basically,
depreciation and its rates are used by the modern governments as a tool of economic policy-making
also, which is the third way how depreciation is used in economics.
Net Domestic Product (NDP) is the GDP calculated after adjusting the weight of the value of
‘depreciation’. This is, basically, net form of the GDP, i.e. GDP minus the total value of the ‘wear
and tear’ (depreciation) that happened in the assets while the goods and services were being
produced. Every asset (except human beings) go for depreciation in the process of their uses, which
means they ‘wear and tear’. The governments of the economies decide and announce the rates by
which assets depreciate (done in India by the Ministry of Commerce and Industry) and a list is
published, which is used by the different sections of the economy to determine the real levels of
depreciations in different assets. For example, a residential house in India has a rate of 1 per cent per
annum depreciation, an electric fan has 10 per cent per annum, etc., calculated in terms of the asset’s
price. This is one way how depreciation is used in economics. The other way it is used in the
external sector while the domestic currency floats freely in front of the foreign currencies, If the value
of the domestic currency falls following market mechanism in front of a foreign currency, it is the
situation of ‘depreciation’ in the domestic currency, calculated in terms of loss in value of the
domestic currency.
Thus, NDP = GDP – Depreciation.
This way, NDP of an economy has to be always lower than its GDP for the same year, since there is
no way to cut the depreciation to zero. But mankind has achieved too much in this area by the
developments such as ‘ball-bearing’, ‘lubricants’, etc., all innovated to minimise the levels of
depreciation.
The different uses of the concept of NDP are as given below:
(a) For domestic use only – to understand the historical situation of the loss due to depreciation to
the economy. Also used to understand and analyse the sectoral situation of depreciation in
industry and trade in comparative periods.
(b) To show the achievements of the economy in the area of research and development which
have tried cutting the levels of depreciation in a historical time period.
However, NDP is not used in comparative economics, i.e., to compare the economies of the world.
Why this is so? This is due to different rates of depreciation which is set by the different economies
of the world. Rates of depreciation may be based on logic (as it is in the case of houses in India—the
cement, bricks, sand and iron rods which are used to build houses in India can sustain it for the
coming 100 years, thus the rate of depreciation is fixed at 1 per cent per annum). But it may not be
based on logic all the time - for example, upto Feb 2000 the rate of depreciation for the heavy
vehicles (vehicles with 6-wheels and above) was 20 per cent while it was done 40 per cent
afterwards - to boost the sales of the vehicles. There was no logic in doubling the rate! Basically,
depreciation and its rates are used by the modern governments as a tool of economic policy-making
also, which is the third way how depreciation is used in economics.
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