Key Takeaways
- Net Domestic Product (NDP) is an annual measure of the economic output of a nation that is adjusted to account for depreciation.
- It is calculated by subtracting depreciation from the gross domestic product (GDP).
- NDP, along with GDP, gross national income (GNI), disposable income, and personal income, is one of the key gauges of economic growth that is reported on a quarterly basis by the Bureau of Economic Analysis (BEA).
- An increase in NDP would indicate growing economic health, while a decrease would indicate economic stagnation.
How Net Domestic Product (NDP) Works
NDP accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration. The depreciation accounted for is often referred to as capital consumption allowance and represents the amount needed to replace those depreciated assets.
NDP = GDP - Depreciation
The frequency and scope of such replacements can vary by type of capital assets. Machinery that is put to regular use may need parts replaced regularly until the entire piece of equipment is no longer usable. While that may take many years, barring unexpected damage or defects, there is a cycle of equipment failure and replacement. Part of the machinery in a factory’s production line may need to be replaced while another set of similar machines continues to function within the same factory. The acquisition of the replacement machinery would be factored into the depreciation aspect of the NDP.
This differs from an expansion of factory operations—for example, the opening of a new site, adding to the total number of factories. The acquisition of new machines for the new factory represents a gain because the demand is driven by the need to increase the scope of operations rather than serve as a replacement. This means the purchased machinery would qualify as a gain for the NDP.
The construction of new homes on previously unused real estate can also represent a gain for the NDP if the residences are not intended to replace defunct or demolished property. For example, in many urban areas, efforts may be made to repurpose underutilized real estate that has fallen into disrepair. Instead of expanding the sprawl of the city, older buildings might be torn down and replaced by new construction intended to fill the same use as the predecessor building. Such an example would qualify as depreciation and replacement. By contrast, if a new housing community is developed, the construction of residences would be contributory to NDP.
An increase in NDP signifies a growing economy, while a decrease indicates economic stagnation.
Special Considerations
NDP, along with GDP, gross national income (GNI), disposable income, and personal income, is one of the key gauges of economic growth, reported quarterly by the Bureau of Economic Analysis (BEA).
Though GDP is frequently cited when assessing the economic health of a country, NDP puts into perspective the pace at which capital assets degrade and must be replaced. This is important as failure to take action would result in a decrease in the country’s GDP.
Related Terms: Gross Domestic Product, Depreciation, Capital Consumption Allowance, Gross National Income, Disposable Income, Personal Income.
