Question

In 2030 Nigeria had a GDP of \(\$ 700\) billion and depreciation of \(\$ 100\) billion. The price level did not rise in 2031 , but its GDP rose to \(\$ 710\) billion and its depreciation rose to \(\$ 180\) billion. Most economists would say that (LO2) a) the Nigerian economy did better in 2030 b) the Nigerian economy did better in 2031 c) there is no way of determining which year was better

Short answer

The Nigerian economy did better in 2030, as its NDP was higher at $600$ billion compared to $530$ billion in 2031.

Step-by-step solution

Calculating Net Domestic Product (NDP) for 2030

To calculate the NDP for 2030, we subtract the depreciation value from the GDP. The formula is: \(NDP = GDP - Depreciation\). Using the given values, the NDP for 2030 is \(NDP_{2030} = 700 - 100 = 600\) billion USD.

Calculating Net Domestic Product (NDP) for 2031

To calculate the NDP for 2031, we apply the same formula and subtract the depreciation value from the GDP. The NDP for 2031 is \(NDP_{2031} = 710 - 180 = 530\) billion USD.

Comparing NDP values

Now that we have calculated the NDP values for both 2030 and 2031, we can compare them to determine which year the Nigerian economy performed better. Since \(NDP_{2030} = 600\) billion USD and \(NDP_{2031} = 530\) billion USD, we can say that the Nigerian economy did better in 2030 as the NDP was higher. So, the answer is: a) the Nigerian economy did better in 2030

Key concepts

GDP and NDP comparison

Understanding the difference between Gross Domestic Product (GDP) and Net Domestic Product (NDP) is crucial when analyzing the health of an economy. GDP represents the total value of everything produced within a country's borders, without considering the resources that might have been consumed or worn out during production. In contrast, NDP takes GDP and adjusts it for the depreciation of assets, such as machinery, buildings, and other forms of capital that are used up over time.

Consider an example where Nigeria's GDP was \(700 billion in 2030, with depreciation standing at \)100 billion. To derive the NDP for that year, we subtract depreciation from GDP: \(NDP_{2030} = GDP_{2030} - Depreciation_{2030} = \(700 billion - \)100 billion = \(600 billion\). Similarly, for 2031, with a GDP of \)710 billion and higher depreciation of \(180 billion, the NDP is \(NDP_{2031} = GDP_{2031} - Depreciation_{2031} = \)710 billion - \(180 billion = \)530 billion\).

The comparison of NDP between years gives a clearer picture of economic wellbeing by factoring in the consumption of fixed capital. Thus, a higher NDP suggests a greater net output and is a preferred indicator over GDP when assessing the economy's performance, as it reflects the actual value added to the economy.

Economic performance analysis

When analyzing economic performance, experts look beyond the surface numbers. They examine various indicators that quantify a country's economic state more accurately. NDP, by accounting for capital depreciation, offers a sharper assessment than GDP alone. If we use the example of Nigeria, while the GDP increased from \(700 billion in 2030 to \)710 billion in 2031, indicating economic growth in nominal terms, the rising depreciation rates from \(100 billion to \)180 billion cause concern.

Analysts would consider the higher depreciation rate and consequently lower NDP in 2031 as signals of possibly lower investment in maintaining and replacing capital assets. It underscores the importance of not only growing the economy but also sustaining the production capabilities.

Moreover, the absence of inflation in 2031, indicated by a stable price level, means that the rise in GDP is not skewed by price changes, making the real output comparison between the two years valid. This approach to economic performance analysis, considering the real values reflected in NDP, provides a more comprehensive view of economic health and sustainable growth.

Depreciation impact on economy

Depreciation represents the wear and tear on an economy's capital goods over time, which is a natural consequence of production and usage. Its impact on the economy is significant as it affects the net value of goods and services produced. For instance, looking at Nigeria's economic data, the sharp increase in depreciation from \(100 billion in 2030 to \)180 billion in 2031 suggests that the assets are being used more intensively or are reaching the end of their useful life without sufficient replacement or maintenance.

This spike in depreciation can have many implications— it may indicate that the capital stock is aging and that there may be future bottlenecks unless investments in new capital are made. It could also reflect on the efficiency of capital usage or the level of technological advancement within the country.

Regardless of the cause, the impact is clear: a higher depreciation rate effectively reduces the nation's net income, leaving less for consumption, savings, or investment. Over time, if not addressed through strategic investment in infrastructure and capital goods, the economy may face slower growth and diminished capacity to produce goods and services efficiently.