CONCEPT OF DEPRECIATION

The output of an economy also consists of production of machines/machineries which are consumed every year, referred to as deprecation and much of the output of such machines could be replacement in nature and not signifying additions to machine or capital stock in the economy. Let us assume that cars are being produced in an economy and there is also depreciation of cars , that is, the cars would eventually have to be replaced after their shell-life. For example, a car is priced at ₹ 3,00,000 and has a life of, say 10 years. Then, depreciation or consumption ) of car is ₹ 30 ,000 a year . Thus , if the output of an economy ignores consumption (or depreciation) of its machine stocks, it is referred as a ‘gross’ concept and if it is accounted for it is known as ‘net’ concept.

Accordingly, there is Gross National Product (GNP) and Gross Domestic Product (GDP).

Hence,

GNP - Depreciation = Net National Product (NNP)

GDP — Depreciation = Net Domestic Product (NDP)

Thus, there are four concepts in the output of an economy—GNP, GDP, NNP and NDP.

Let us now try to understand which method is technically the best measure of growth.

Clearly, it is the NNP as it first covers all the nationals of a country and is also a net increase after depreciation. It is also 

called as “National Income” of an economy. But NNP/GNP are gradually 

losing significance since countries

have high external debts that are

serviced through internal resources

which tends to increase outflows and 

reduce GNP of a country, leaving GDP unaffected. Similarly, the sale of assets to foreign entities will also have similar affecting impact. Further remittances have become significant in economies like GNP not seen as a correct way to judge output of an economy.