Net Domestic Product

Updated on January 30, 2024
Article byKosha Mehta
Reviewed byDheeraj Vaidya, CFA, FRM

Net Domestic Product (NDP) Meaning

Net Domestic Product (NDP) measures the total value of all goods and services produced in a country, adjusted for the depreciation of physical capital. It is calculated by subtracting the capital depreciation from the Gross Domestic Product (GDP), which is the sum of all goods and services produced in a country. It is used to measure the total economic output of a country, taking into account depreciation and capital consumption.

Net Domestic Product (NDP)

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NDP is a more accurate measure of a country’s economic output, as it considers the wear and tear of physical capital, which is a key factor in long-term economic growth. In addition, NDP helps understand the number of resources available for consumption or investment. This information is crucial for policymakers and investors.

Key Takeaways

  • NDP is a useful tool for long-term economic analysis, as it considers the decline in the value of physical capital over time, which is an important factor for sustained economic growth. Thus, it provides a clearer picture of a country’s economic performance.
  • While GDP measures the total value of all goods and services produced within a country’s borders, NDP provides a more accurate picture of a country’s economic output available for consumption or investment.
  • NDP does not consider the effects of indirect taxes and subsidies, which can distort market prices.

Net Domestic Product Explained

NDP is a measure of a country’s economic performance that considers the depreciation of physical capital, unlike GDP, which only reflects the sum of all goods and services produced within a country’s borders. In other words, it accounts for the reduction in the value of the country’s assets due to aging, wear and tear, or obsolescence.

The NDP better assesses a country’s economic output by subtracting this value from GDP. As a result, it provides a more accurate picture of the available resources for consumption or investment.

Net Domestic Product at market price includes indirect taxes and subsidies, as well as the depreciation of physical capital. It is calculated by adding indirect taxes, subtracting subsidies, and including depreciation to the value of output, which is the value of all goods and services produced within a country’s borders.

This provides a more comprehensive picture of a country’s economic output, as it considers both the production of goods and services and the market prices at which they are sold, including the effect of government interventions.

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NDP Formula

The formula for Net Domestic Product (NDP) is as follows:

NDP = GDP – Depreciation

Where:

GDP is the Gross Domestic Product, the total value of all goods and services produced in a country.

Depreciation is the reduction in the value of physical capital due to aging, wear and tear, or obsolescence.

In other words, the NDP is calculated by subtracting the depreciation of physical capital from the GDP to give a more accurate picture of a country’s economic output that is available for consumption or investment.

Examples

Let us have a look at the examples to understand the concept better.

Example #1

Suppose a country’s economy produces $100 million worth of goods and services in a year, and the depreciation of its physical capital is $20 million. The GDP of the country this year would be $100 million, and the NDP would be $80 million, calculated as follows:

NDP = GDP – Depreciation

= $100 million – $20 million

= $80 million

In this example, the NDP of $80 million is a more accurate measure of the country’s economic output, as it considers the wear and tear of physical capital. The $80 million is the amount available for consumption or investment in the economy after accounting for the depreciation of physical capital.

Example #2

Here’s an example of how Net Domestic Product can be used to measure a country’s economic output:

Consider a country with two industries, agriculture, and manufacturing. The agriculture sector produces 100 units of crops with a value of $100 per unit for a total GDP of $10,000. The manufacturing sector produces 50 units of goods with a value of $200 per unit for a total GDP of $10,000.

In this example, the country’s Gross Domestic Product (GDP) would be $20,000 ($10,000 from agriculture + $10,000 from manufacturing). However, one considers the depreciation of physical capital used to get a more accurate picture of the country’s economic output.

Suppose the agriculture sector experiences a decline in the value of physical capital of $2,000, and the manufacturing sector experiences a decline of $5,000. As a result, this country’s

Net Domestic Product (NDP) would be $13,000 ($20,000 – $2,000 – $5,000)

In this theoretical example, the NDP considers the depreciation of physical capital, providing a more accurate picture of the country’s economic output. This measure is useful for policymakers and investors. Using this, they can better understand the resources available for consumption or investment in the country.

Net Domestic Product At Factor Cost (NDP-FC)

Net Domestic Product at factor cost measures a country’s economic output considering the production of goods and services. Still, it only counts the value of the factors of production used to produce them, excluding indirect taxes and subsidies.

In other words, GDP measures the total value of all goods and services produced within a country. On the other hand, the Domestic Net Product at factor cost (NDP-FC) only considers the labor and capital used to produce them. Also, it does not account for indirect taxes and subsidies.

The NDP-FC provides a more accurate measure of a country’s economic performance. It is useful in comparing the economic output of different countries. Thus, it eliminates the distorting effect of indirect taxes and subsidies, which can vary greatly across countries.

NDP-FC Formula

The formula for NDP-FC is:

NDP-FC = Value of Output – Indirect Taxes + Subsidies

In other words, the NDP-FC is calculated by subtracting the indirect taxes and adding the subsidies to the value of output, which is the value of all goods and services produced within a country’s borders. The result provides a more accurate picture of a country’s economic output. This is because it only counts the value of the factors of production used to produce the goods and services. In addition, it excludes the taxes and subsidies that distort the market price.

Gross Domestic Product vs Net Domestic Product

Here is a comparison of Gross Domestic Product (GDP) and Net Domestic Product (NDP) in a table format:

 BasisGross Domestic Product (GDP)Net Domestic Product (NDP)
DefinitionThe total value of all goods and services produced within a country’s borders.The total value of all goods and services produced within a country’s borders is adjusted for the depreciation of physical capital.
CalculationGDP = Value of Output + Indirect Taxes – SubsidiesNDP = GDP – Depreciation
PurposeThe measure of a country’s overall economic performanceThe measure of a country’s economic output available for consumption or investment
LimitationsDoes not take into account the depreciation of physical capitalDoes not take into account indirect taxes and subsidies
Use in economic analysisCommonly used as a broad indicator of economic activityProvides a more accurate picture of a country’s economic output, useful in long-term economic analysis

Frequently Asked Questions (FAQs)

What is net domestic Product at market price?

Net Domestic Product at market price (NDP MP) is a measure of a country’s economic output that considers the production of all goods and services within its borders and the market prices at which they are sold. Thus, it includes indirect taxes and subsidies, as well as the depreciation of physical capital.

What is net domestic Product in economics?

Net Domestic Product measures a country’s economic output that considers the depreciation of physical capital. It is a measure of the total value of all goods and services produced within a country’s borders, adjusted for the decline in the value of physical capital over time due to wear and tear, obsolescence, and other factors.

Why do we need net domestic Product?

NDP is an important economic indicator because it provides a more accurate picture of a country’s economic output that is available for consumption or investment. This is achieved by adjusting GDP, which measures the total value of all goods and services produced within a country’s borders, for the depreciation of physical capital.

This has been a guide to Net Domestic Product & its meaning. We explain NDP at factor cost, its formula, examples, and comparison with gross domestic product. You can learn more about it from the following articles –