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Tuesday, June 1, 2021

Net Domestic Product (NDP) - Indian Economy

Net Domestic Product (NDP) 

Net Domestic Product (NDP) is the GDP calculated after adjusting the weight of the value of 'depreciation'. This is, basically, a net form of the GDP, i.e., GDP minus the total value of 'wear and tear' (depreciation) that happened in the assets while the goods and services were being produced. All assets (except human beings) go for depreciation in the process of their uses, which means they are 'wear and tear'. The government of the economies decides and announces the rates by which assets depreciate (done in India by the Ministry of Commerce and Industry). A list is published, which is used by different sections of the economy to determine the real levels of depreciation in different assets. For example, a residential house in India has a rate of 1% per annum depreciation, an electric fan has 10% per annum, etc., calculated in terms of the asset's price.

Net Domestic Product (NDP) - Indian Economy

 
This is one way how depreciation is used in economics. 

The second 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 the 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, the 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 developed several techniques and tools such as 'ball-bearings, 'lubricants', etc. to cut the loss due to depreciation.

The different uses of concepts of NDP are as given below:

  • For domestic use only: to understand the historical situation of the loss due to depreciation to the economy. Also used to understand and analyze the sectoral situation of depreciation in industry and trade in comparative periods.

However, NDP is not used in comparative economics, i.e., to compare the economies of the world. This is due to different rates of depreciation which are set by 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 sued to build houses in India can sustain it for the coming 100 years, thus the rate of depreciation is fixed at 1% annum). But it may not be logical all the time, for example, up to February 2000 the rate of depreciation for heavy vehicles was 20% while it was raised to 40% afterward- 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. 

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