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Net Domestic Product (NDP)

The net book value of all finished goods and services produced inside a country geographically during a given period

What is Net Domestic Product (NDP)?

Net domestic product (NDP) measures the economic output of a country. It represents the net book value of all finished goods and services produced inside a country geographically during a given period. NDP is a key indicator of a country’s economic growth, which is released by the Bureau of Economic Analysis (BEA) quarterly.

 

Net Domestic Product

 

Compared with gross domestic product (GDP), NDP takes the depreciation of the country’s capital assets into account, including housing, vehicles, machinery, and so on. The depreciation is known as capital consumption allowance (CCA). It measures the amount of money that a country spends to maintain its current economic production level during a specific period.

Net not only covers the accounting depreciation but also accounts for other causes of the decrease in value, for example, obsolescence and destruction.

 

Summary

  • Net Domestic Product (NDP) measures the net book value of all the final goods and services produced within a country geographically during a given period.
  • NDP = GDP – Depreciation
  • An expanding gap between GDP and NDP indicates economic stagnation. A narrowing gap between GDP and NDP represents a better condition in the country’s capital stock.

 

Net Domestic Product (NDP) vs. Gross Domestic Product (GDP)

NDP and GDP are indicators of a country’s economic activity level and growth rate. GDP measures the total market or monetary value of all finished goods and services produced inside a country’s geographic borders during a specific period.

NDP covers the same components as GDP, but it also takes the capital consumption allowance (CCA) into account, which measures the depreciation of the capital goods of a country. By analyzing the CCA, economists can confirm the economic trends, but CCA itself is a lagging indicator.

There are several approaches to calculate GDP. A generally used one is the expenditure approach. This sums up the expenditures from different groups participating in the economy. The components include the private consumption expenditure, government consumption expenditure, private domestic investment, and net exports (exports – imports).

Gross investment is used to calculate GDP, while net investment (gross investment – depreciation) is used to calculate net domestic product. NDP can be calculated by subtracting the depreciation of the capital stock of a country from its GDP.

 

Net Domestic Product (NDP) – Analysis

Net domestic product is sometimes considered a better economic indicator than GDP since the former also reveals the amount of investment spent on improving the obsolete equipment to maintain the production level. An increase in depreciation alone can push up the GDP level, but it does not indicate improvements in the social and economic well-being in that country.

Therefore, NDP may give a better insight into a country’s economic health by considering its net investment. When the net investment is positive, the economy grows. When the net investment is negative, the investment cannot even cover the depreciation to maintain the present output level, which indicates the economy declines. A zero net investment means the country’s capital stock is constant.

For example, a country with has a $5 trillion investment expenditure on new assets in one year, but it also records $6 trillion in depreciation for the same year. All the $5 trillion is counted in GDP as its gross investment. However, the net investment is only -$1 trillion ($5 trillion – $6 trillion), which means there is no actual economic growth from the country’s domestic investment.

Comparing the GDP and NDP of a country, an expanding gap between the GDP and NDP indicates an increase in obsolescence and value deterioration of that country’s capital stock. It can be a signal of economic stagnation.

A shrinking gap between the GDP and NDP represents a better condition of the country’s capital stock. If the country does not invest in restoring the value lost due to depreciation, its GDP will eventually fall.

 

Net Domestic Product (NDP) vs. Net National Product (NNP)

As NDP is calculated by subtracting depreciation from GDP, NNP can be calculated by subtracting depreciation from GNP. The relationship between GDP and NDP is similar to the relationship between GNP and NNP.

The major difference between the domestic product and national product indicators is that the domestic product indicators measure the value of finished goods and services produced inside a country’s geographic border, while national product indicators measure the value of finished goods and services produced by a country’s citizens.

GDP and NDP consider the economic activity of a country geographically. Regardless of whether the products and services are produced by a domestic company or foreign company. As long as they are produced within the country’s borders, they are counted into that country’s GDP.

GNP and NNP measure the economic activity of a nation made by its citizens. The products and services provided by its citizens in a foreign country are considered a part of that nation’s GNP and NNP. The economic activities that take place inside the country but made by foreign companies are not included.

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Gross Domestic Product (GDP)
  • Functional Obsolescence
  • Gross National Product
  • Economic Depreciation

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