Q.: 1: The manuscript for this book was typed for free by a friend. Had I hired a secretary to do the same job, GDP would have been higher, even though the amount of output would have been identical. Why is this? Does this make sense? A.: 1: If a secretary were hired to type the manuscript, they would have had the opportunity to provide a service at a price. We know that each good and service produced and brought to market has a price. That price serves as a measure of value for calculating total output; in this case, the task of completing the typing for this book.
GDP is the total market value of all final goods and services produced within a nation’s borders in a given time period. If the job was undertaken by the secretary, the
This value of capital used up in producing goods and services is called depreciation.
Gross and Net Investment: As capital is used, some of it wears out or becomes obsolete; it depreciates. Investment adds to the capital stock, and depreciation reduces it. Gross investment minus depreciation is net investment. If gross investment is greater than depreciation in any period, then net investment is positive and the capital stock increases. If gross investment is less than depreciation in any period, then net investment is negative and the capital stock declines.
Conclusion: Thus, NDP is the sum total of money value of final goods and services produced in a country on an accounting year excluding depreciation cost. NDP estimates how much the country has to spend to maintain the current GDP. If the country is not able to replace the capital stock lost through depreciation, then GDP will fall. In addition, a growing gap between GDP and NDP indicates increasing obsolescence of capital goods, while a narrowing gap means that the condition of capital stock in the country is improving.
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If gross investment is not large enough to replace the capital that depreciates in a particular year, then net investment will likely be less than zero. As a result, the Production Possibilities curve shifts inward depicting inefficient use of resources.