Problem 8 Is it true that net domestic pro... [FREE SOLUTION]

Chapter 7: Problem 8

Is it true that net domestic product plus the capital consumption allowance is equal to GDP? Explain your answer.

Short Answer

Expert verified

Yes, it is true that Net Domestic Product (NDP) plus the Capital Consumption Allowance (CCA) equals Gross Domestic Product (GDP). This is because GDP represents the gross total value of all goods and services, which includes the net value (NDP) as well as depreciation (CCA).

Step by step solution

Understanding the concepts

First step is understanding these economic concepts. GDP (Gross Domestic Product) represents the total market value of all goods and services produced in a country in a year. Net Domestic Product (NDP) is GDP minus depreciation on a country's capital goods. It represents the net book value of all goods and services produced within a nation at a specified time period. Lastly, the CCA (Capital Consumption Allowance) is an annual deduction allowed by the IRS on certain property, plant, and equipment to recover their cost.

Formulating the relationship

The equation that links GDP, NDP and CCA is: GDP = NDP + CCA. The GDP includes the total value of all goods and services produced within a country during a year, including those that went towards maintaining or replacing depreciated capital stock. The CCA measures this depreciation on capital goods, and when it is added to the NDP (which excludes depreciation), it equals the GDP.

Explaining the answer

So, it is true that the Net Domestic Product plus the Capital Consumption Allowance is equal to Gross Domestic Product. This is because the NDP calculates the net value of all goods and services produced (excluding depreciation). When depreciation, as represented by the CCA, is then added to this net value, you get the gross value of all goods and services, which is the GDP.