Why is depreciation deducted while calculating net domestic product?
Answer and explanation
Correct answer: Because it is wear and tear of fixed capital
GDP measures domestic production before deducting the value of fixed capital used up in producing that output. To obtain NDP, this consumption of fixed capital, commonly called depreciation, is deducted: NDP = GDP − Depreciation. The deduction prevents output from being overstated by ignoring the capital consumed. Wages, export income and the saving rate are not the relevant adjustment in this calculation.
Frequently asked questions
What is the correct answer to this question?
Because it is wear and tear of fixed capital
Why is this the correct answer?
GDP measures domestic production before deducting the value of fixed capital used up in producing that output. To obtain NDP, this consumption of fixed capital, commonly called depreciation, is deducted: NDP = GDP − Depreciation. The deduction prevents output from being overstated by ignoring the capital consumed. Wages, export income and the saving rate are not the relevant adjustment in this calculation.
Which subject and chapter does this question cover?
This is a Class 11 Accountancy question. Chapter: Depreciation, Provisions, and Reserves.
