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 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.,

which is 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 as against the foreign currencies. If the value of the domestic currency falls following market mechanism in comparison to a foreign currency, it is a 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 through 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 February 2000 the rate of depreciation for heavy vehicles (vehicles with 6-wheels and above) was 20 per cent while it was raised to 40 per cent afterwards—to boost the sales of heavy vehicles in the country. There was no logic in doubling the rate. Basically, depreciation and its rates are also used by modern governments as a tool of economic policymaking, which is the third way how depreciation is used in economics.