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February 19, 2018 

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KALDOR-HICKS IMPROVEMENT: Based on the Kaldor-Hicks efficiency criterion, the notion that an action improves efficiency if the willingness to pay of those benefiting exceed the willingness to accept of those harmed. In other words, if those gains exceed those losses, or the benefits exceed the costs, then social welfare is improved and undertaking the action provides a net benefit to society. In other words, the winners can, in principle, compensate the losers for their loss, and still come out ahead. The actual compensation, however, is required. A contrasting condition for attaining efficiency is the Pareto improvement.

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NET DOMESTIC PRODUCT:

The total market value of all final goods and services produced within the political boundaries of an economy during a given period of time, usually a year, after adjusting for the depreciation of capital. Net domestic product, usually abbreviated NDP, is one of five key National Income and Product Accounts measures reported regularly (every three months) by the Bureau of Economic Analysis. The other four measures are gross domestic product, national income, personal income, and disposable income. Net domestic product has largely replaced a comparable term, net national production.
Net domestic product (NDP) results from adjusting gross domestic product (GDP) for the amount of capital depreciation that occurs during production. As the term "gross" implies, "gross" domestic product is the grand total of all production in the economy. In contrast, as the term "net" indicates, "net" domestic product subtracts or "nets out" the wear and tear on capital goods from the gross value.

A Little Wear and Tear

By adjusting for depreciated capital, net domestic product provides a measure of the economy's overall amount of current production that contributes to progress. The problem with gross domestic product is that it IS, in fact, an aggregate measure and includes ALL production. However, to the extent that a portion of this production includes new capital goods that are used merely to replace worn out, broken down, or otherwise depreciated capital, then all production measured by gross domestic product does not ADD to the economy.
  • Suppose for example, that the economy's gross domestic product is a grand total of $10 trillion, with $2 trillion of this total consisting of investment expenditures for capital goods. A $2 trillion total for capital goods production suggests that the economy is likely to achieve significant economic growth in the year to come.

  • However, economic growth is likely to be less substantial if a portion of this capital investment is merely used to replace capital depreciated over of the year in the course of production. If, for example, $1 trillion worth of capital wears out, breaks down, or becomes technologically obsolete during the year, then the economy ONLY has $1 trillion worth of ADDITIONAL capital that can be used to promote economic growth. In fact, if capital depreciation is a full $2 trillion, then there is NO new capital available for economic growth. There is NO capital-inducing economic growth.

  • It could be even worse. Should capital depreciation exceed $2 trillion, then not only is the economy NOT expanding, it is actually shrinking. The production of new capital is not enough to replace the depreciated capital, let alone add extra growth-promoting capital. The capital stock is actually smaller at the end of the year than at the beginning.

While capital depreciation rarely exceeds capital investment, in a given year, a sizeable portion of capital goods are used to replace depreciated capital. During the 1960s and 1970s, capital depreciation was in the range 40-60 percent of capital investment. Into the 1990s and beyond, this fraction was in the 80-90 percent range.

Doing a Little Adjustment

Net Domestic Product
The following equation symbolically illustrates how net domestic product (NDP) is related to gross domestic product (GDP):

NDP=GDP - CCA

The CCA in this equation stands for capital consumption adjustment, the official term for capital depreciation.

A simple rearrangement of terms provides an alternative way to express the relation between GDP and NDP:

GDP=NDP + CCA

In essence, both equations indicated that gross domestic product can be separated into two components--net domestic product and capital depreciation.

This separation is graphically illustrated in this diagram. The two-toned column on the left represents gross domestic product. This column is two-toned because it can be separated into capital consumption adjustment, which is the top red portion, and net domestic production, which is the lower blue portion. The center column then indicates that portion of gross domestic product going to the capital consumption adjustment. The right column then indicates the portion of gross domestic product that remains for net domestic product.

A Little Bit About Net National Product

Net domestic product replaced an old standard that had existed for several decades--net national product. The relation between net domestic product and net national product is the same as that between gross domestic product and gross national product.

Net domestic product is the (net) value of final goods and services produced within the political boundaries of the domestic economy, regardless of the citizenship of the resource owners. Net national product, in contrast, is the (net) value of final goods and services produced citizens of the domestic economy, regardless of geographic location. The difference between these two is net foreign factor income.

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Recommended Citation:

NET DOMESTIC PRODUCT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: February 19, 2018].


Check Out These Related Terms...

     | capital consumption adjustment | net national product | capital depreciation | national income | personal income | disposable income | gross national product | real gross domestic product |


Or For A Little Background...

     | gross domestic product | production | product markets | market | value | business cycle indicators | National Income and Product Accounts | Bureau of Economic Analysis | National Bureau of Economic Research |


And For Further Study...

     | macroeconomic problems | macroeconomic theories | macroeconomic sectors | circular flow | business cycles | stabilization policies | gross domestic product, ins and outs | gross domestic product, welfare | gross domestic product, expenditures | gross domestic product, income | net foreign factor income | unemployment | inflation |


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     | Bureau of Economic Analysis |


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