Consumption of fixed capital (depreciation) ?can be determined by
Multiple Choice
adding net investment to gross investment.
subtracting net investment from GDP.
adding taxes on production and imports to NDP.
subtracting NDP from GDP.
The Correct Answer and Explanation is :
The correct answer is “subtracting NDP from GDP.”
Explanation:
To understand the relationship between Gross Domestic Product (GDP), Net Domestic Product (NDP), and depreciation (also known as the consumption of fixed capital), it’s essential to understand the definitions of these terms:
- Gross Domestic Product (GDP): GDP is the total market value of all goods and services produced within a country’s borders in a given time period. It represents the overall economic output.
- Net Domestic Product (NDP): NDP is derived by subtracting depreciation (or consumption of fixed capital) from GDP. Depreciation represents the amount of capital that is used up or becomes obsolete over time due to wear and tear, aging, or technological obsolescence. The NDP, therefore, reflects the economic output after accounting for the reduction in the value of capital assets.
The relationship between GDP and NDP can be expressed as: NDP=GDP−DepreciationNDP = GDP – \text{Depreciation}
From this equation, if you subtract NDP from GDP, you are left with depreciation: Depreciation=GDP−NDP\text{Depreciation} = GDP – NDP
Thus, the correct way to determine the consumption of fixed capital (depreciation) is by subtracting NDP (Net Domestic Product) from GDP (Gross Domestic Product). This allows us to measure the portion of economic output that is used to maintain or replace capital assets in the economy.
Other options provided are not correct because:
- Adding net investment to gross investment gives you total investment, not depreciation.
- Subtracting net investment from GDP doesn’t directly relate to depreciation.
- Adding taxes on production and imports to NDP doesn’t affect depreciation, as taxes are not directly related to capital consumption.
Therefore, the method to determine depreciation is by subtracting NDP from GDP.