Gross Domestic Product (GDP) and Net Domestic Product (NDP)
Gross Domestic Product or GDP is the money value of all final goods and services produced in the domestic territory of a country during an accounting year. Gross stands for ‘total’ and Domestic means all activities taking place within the boundary of the country. The word Product includes both “Goods and Services’. By definition, it takes care of all goods and services produces within the territory of the country by both Indians and foreign nationals. When we subtract depreciation allowance from GDP, we obtain Net Domestic Product or NDP.
Per annum percentage change in GDP is the growth rate of an economy. If the GDP of a country has increased by 10% compared to previous year, it has registered a GDP Growth of 10%. GDP growth rate is an indication of economic activities taking place with the domestic territory of the country. Higher GDP growth rate indicates higher economic activities and higher income generation and higher living standards for the people.
Domestic territory for calculation of Gross Domestic Product (GDP)
Domestic territory for the purpose of GDP covers
a. Political boundary of the country including territorial waters
b. Ships and aircrafts operated by residents of a country between two or more countries
c. Fishing boats , oil and natural gas rigs operated by the residents of a country in the international waters or where the country has exclusive rights to operate
d. Embassies, consulates and military establishments of the country located in other countries
For arriving at the monetary value of GDP, goods and services produced within the geographical boundary of the country by both resident citizens and foreign nationals can be considered. However, contributions made by the country’s citizens from abroad are not considered for measuring GDP.
Measurement of Gross Domestic Product (GDP)
Gross Domestic Product or GDP measures the goods and services produced only in the year of production. If a good sold in this year was produced in previous year, it will not reflect in this year’s GDP as it was taken care in the year of production itself. GDP also does not account gifts. Second hand sales of products are excluded because no production is included, except for the sales service.
If Q is the total quantity of goods and services produced within the domestic territory of the country by both residents and foreign nationals and P is the price of final goods and services then
Gross Domestic Product (GDP) of the country G = Q x P
GDP at Factor Cost and GDP at Market Price
GDP at market price includes indirect taxes but excludes the subsidies given by the Government. GDP at factor cost can be arrived by subtracting indirect taxes from GDP at market place and adding subsidies. In short,
GDP at factor cost = GDP at market cost – indirect taxes + subsidies
GDP at market cost = GDP at factor cost + indirect taxes – subsidies
Net Domestic Product (NDP)
While measuring GDP, no provision is provided for depreciation. Hence it will not reflect complete flow of goods and services through various stages. Capital goods like buildings, tools, equipment, machines etc get depreciated on usage during stages of production. These capital goods will be required to be replaced after certain period of life and for that purpose depreciation allowance is permitted. In order to get Net Domestic Product, we must deduct depreciation allowance from Gross Domestic Production.
Net Domestic Product (NDP) = GDP- Depreciation Allowance
