The economic stability of a nation is a macroeconomic variable that completely depends on the national income. The income can be calculated as the outcome of total economic activities in a given year.
The two major concepts that involved in this study and analysis are the Gross Domestic Product (GDP) and Net Domestic Product (NDP). They both are closely linked together in determining the nation’s economic state.
Though we always listen to the term GDP, NDP plays a vital role in establishing the need for growth. The key differences between the two crucial concepts are many and underlying each other.
Key Takeaways
- GDP (Gross Domestic Product) measures the total value of goods and services produced within a country’s borders during a specified period. NDP (Net Domestic Product) is GDP minus the depreciation of capital goods.
- GDP measures the overall economic activity within a country, while NDP provides a more accurate picture of the country’s economic growth and development by considering capital depreciation.
- GDP and NDP are important economic indicators that can be used to track changes in a country’s economy over time.
GDP vs NDP
The difference between GDP and NDP is the indicator it refers to. GDP indicates a nation’s productivity in a given period, while NDP indicates the quantity of increment required in production to maintain healthy GDP. These terms ideally measure the economic health of a nation.
Gross Domestic Product is the measure of total production that has happened across all sectors in a given period. Say, for example, total goods produced in a quarter or 6 months or even a year. Financial analysts compare this metric with previous data to determine the economic state of a country.
Net Domestic Product lets us know the capital goods utilized during a said period. It can be in the form of housing, machinery or even vehicles.
So, NDP is calculated using GDP and deducting the reduced or depreciation value of the available capital goods. Incidentally, NDP helps the nation to know if the GDP has to be improved or not.
Comparison Table
| Parameters of Comparison | GDP | NDP |
|---|---|---|
| Definition | GDP is the total goods and services produced in a particular period. | NDP is the availability of goods and the required amount of capital to be raised to keep the GDP healthy. |
| Indicator | GDP indicates the economic state of a nation. | NDP indicates the required amount of products and services to replace the depreciated capital goods. |
| State/Level | GDP must be higher than NDP. | NDP must be always lower compared to GDP. |
| Analysis | GDP helps to analyse the stability of a nation in terms of economy and well being. | NDP helps to analyse the ways to keep the GDP higher. |
| Research | Identifying ways to keep the production level optimal with less expenditure. | Identifying ways to cut down on depreciation value, thereby maintaining a narrow gap between GDP and NDP. |
What is GDP?
Gross Domestic Product is a metric that helps to understand the economic size of a nation. In general, it helps in understanding the total number of goods and services made in a particular period. Ideally, this period shall be the financial year.
There are two ways to calculate GDP
- Expenditure Approach
- Income Approach
A country might use both approaches to make informed decisions to stabilise the economy. It is well known that GDP completely focuses on the total value of the goods and services produced within the country.
This is irrespective of whether the value-added is from residents or NRIs.
The expenditure approach is calculated using all the amount spent on the goods and services.
Considering,
C = Spending on Consumption
I = Investments in Business
G = Purchases made by the Government
X= Exports
M = Imports
GDP = C+I+G+(X-M).
The income approach to calculating GDP is entirely different from the one that we saw above. GDP in this mode is calculated considering three factors.
- National Income
- Statistical Discrepancy
- Capital Consumption Allowance
Adding all these three factors shall give the GDP of the nation.
The growth rate of a nation is measured using this metric. The internal strength of the nation’s economy depends on GDP.
What is NDP?
Net Domestic Product is the value that determines the level of upscaling to be done in GDP. It is the value that is attained by deducting the Depreciation value of the capital goods that a country has with the GDP.
NDP = GDP – D, D = Depreciation of Capital Goods
In general, while manufacturing the goods, there shall be wear and tear on assets. This value is taken as ‘Depreciation’, and NDP is calculated.
The materials used in the process of manufacturing go for reduction as products are made. This is deducted, and the final Net Domestic Product is attained. We must also keep in mind that human capital is not considered in asset reduction or depreciation.
The authorities of a government shall release the list of capital assets with their depreciating value every year. This should be taken into serious consideration while manufacturing the goods.
The massive depletion of the country’s assets shall lead to a national economic disaster.
NDP is never used in comparative analysis with that of any other country. This is mainly because the countries shall have different depreciation values, which may not stand as a stable calibrating point.
Main Differences Between GDP and NDP
- The main difference between GDP and NDP is that the GDP can be used in economic comparison with other countries, while NDP can never be used in such comparative studies.
- The value of GDP determines the health of the economy, while the value of NDP gives the amount of production to be increased to keep a healthy GDP.
- GDP marks the production strength of a nation, while NDP marks the diligence in using capital assets.
- GDP can help predict the economic state in the coming years, while NDP helps predict the number of goods to be used for future production.
- GDP determines the national income, while NDP determines the optimal resource depletion.
- https://onlinelibrary.wiley.com/doi/abs/10.1111/j.0034-6586.2004.00129.x
- http://www.csls.ca/ipm/7/spant-e.pdf
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