Question

In national income accounting, depreciation is deducted from gross domestic product to obtain:

• A. Net Domestic Product
• B. Gross National Product
• C. Personal Income
• D. National Disposable Income

Hint:

Gross \(\rightarrow\) Includes depreciation.
Net \(\rightarrow\) Excludes depreciation.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
National income aggregates are derived based on several adjustments.
One of the most fundamental distinctions is between "Gross" and "Net" values.
Depreciation, also known as "Consumption of Fixed Capital," refers to the reduction in the value of fixed assets (machinery, buildings, equipment) due to normal wear and tear, obsolescence, or accidental damages during the production process.
Step 2: Key Formula or Approach:
The mathematical relationship between Gross and Net aggregates is:
\[ \text{Net Value} = \text{Gross Value} - \text{Depreciation} \]
Similarly:
\[ \text{Gross Value} = \text{Net Value} + \text{Depreciation} \]
Step 3: Detailed Explanation:
Gross Domestic Product (GDP) is the total market value of all final goods and services produced within the domestic territory of a country in an accounting year, inclusive of the value of capital used up in the process.
Since production causes capital assets to wear out, a part of the total output must be set aside to replace these worn-out assets. This part is "Depreciation."
To find the actual or "net" addition to the wealth of the domestic economy, we must subtract this replacement cost from the total production value.
Calculation: \(GDP - \text{Depreciation} = NDP\) (Net Domestic Product).
Other options:
- (B) GNP is GDP adjusted for Net Factor Income from Abroad (NFIA).
- (C) Personal Income is derived from Private Income after subtracting corporate taxes and undistributed profits.
- (D) National Disposable Income is the maximum value of goods and services that the residents can consume without reducing their wealth.
Step 4: Final Answer:
Subtracting depreciation from GDP yields the Net Domestic Product (NDP).