Net Domestic Product (NDP)

Key takeaways
* Net Domestic Product (NDP) measures a country’s annual economic output after accounting for wear and tear on capital.
* Formula: NDP = GDP − Depreciation (also called Consumption of Fixed Capital, CFC).
* NDP gives a better sense of sustainable production and long‑term economic health than GDP alone.
* Rising NDP signals growth; falling NDP indicates stagnation or a decline in sustainable output.

Overview

Net Domestic Product (NDP) is the market value of all final goods and services produced within a country in a year, adjusted for the loss in value of capital assets (machines, buildings, vehicles, etc.) due to wear, obsolescence, or accidental damage. By subtracting depreciation from Gross Domestic Product (GDP), NDP estimates how much output remains after replacing consumed capital.

How NDP is calculated

The basic formula is:
NDP = GDP − Depreciation

Depreciation in national accounts is often reported as Consumption of Fixed Capital (CFC). GDP measures total production; CFC represents the amount of that production that must be set aside to replace capital that has been used up during the period.

Capital consumption allowance (what depreciation means in practice)

Depreciation (the capital consumption allowance) covers the replacement cost of capital worn out or rendered obsolete over the year. Examples:
* A factory replaces a worn conveyor belt or motor: those replacement costs are part of depreciation.
* Replacing an old machine with a similar one to maintain current production is treated as replacing consumed capital.
* Building a new factory or adding new production capacity is an expansion — the investment contributes to GDP growth but is not merely replacement; net gains from expansion show up in NDP once depreciation is accounted for.

Depreciation varies by asset type and usage. Some equipment requires frequent part replacements; other capital lasts many years. National accountants estimate aggregate depreciation to derive NDP from GDP.

Why NDP matters

NDP provides a clearer picture of long‑term economic sustainability than GDP because it distinguishes between output used to replace lost capital and output that represents net addition to the economy’s productive capacity. Policymakers and analysts use NDP to assess the level of consumption that can be sustained without depleting the capital stock.

Comparisons with related measures

• NDP vs GDP: GDP measures total production. NDP equals GDP minus depreciation, so it reflects production net of capital consumed. NDP can be a better indicator of sustainable output.
• NDP vs Net National Product (NNP): NNP measures the net value of goods and services produced by a nation’s residents, both domestically and abroad (i.e., national production), after depreciation. NDP measures net production within a country’s geographic borders (domestic) after depreciation.

Practical interpretation

• An increase in NDP suggests the economy is producing more net output after preserving capital, indicating growth in sustainable production.
• A decrease in NDP suggests output is insufficient to cover capital consumption, pointing to stagnation or declining sustainable capacity.
• Distinguishing replacement investment from expansion investment is crucial when interpreting whether higher investment implies true growth or merely maintenance.

Conclusion

NDP refines GDP by accounting for capital consumption, offering a more realistic gauge of sustainable economic output. It helps separate resources needed to maintain the productive base from those that represent genuine expansion of capacity.