Question

In declining order of size, which of these is the proper ranking? (LO2, 4) a) GDP, NDP, national income b) NDP, GDP, national income c) National income, GDP, NDP d) National income, NDP, GDP e) GDP, national income, NDP f) NDP, national income, GDP

Short answer

a) GDP, NDP, national income

Step-by-step solution

Definition of GDP

Gross Domestic Product (GDP) is the total value of all goods and services produced within a country's borders during a specific time period, usually one year. It is an important indicator of a country's economic health and standard of living.

Definition of NDP

Net Domestic Product (NDP) is the total value of all goods and services produced in a country, minus the depreciation of capital assets like buildings, machinery, and equipment. In other words, it is the GDP adjusted for depreciation.

Definition of National Income

National income is the sum of all incomes earned by a country's residents and businesses, including wages, profits, rent, and interest. It can be calculated as GDP minus taxes plus government transfer payments, or alternatively as NDP minus depreciation.

Relationship between GDP, NDP, and National Income

Since depreciation is always a positive value, it follows that NDP is always smaller than GDP. Similarly, since taxation and government transfer payments are always positive values, it follows that national income is always smaller than GDP or NDP. Thus, the correct order of size is: 1. Gross Domestic Product (GDP) 2. Net Domestic Product (NDP) 3. National Income

Match the Correct Answer

Based on our analysis, the correct ranking is: \( GDP > NDP > \text{national income} \). The correct answer is: a) GDP, NDP, national income

Key concepts

Gross Domestic Product (GDP)

Gross Domestic Product, commonly known as GDP, is a key economic indicator that measures the total value of all goods and services produced within a country's boundaries over a specific time period, typically a year. It is an essential measure used to assess the economic performance of a country, providing insights into overall economic health and living standards. When GDP increases, it indicates economic growth and a higher standard of living, whereas a decrease can be a sign of economic contraction.

GDP can be calculated using three approaches: the production approach, the income approach, and the expenditure approach:

• Production Approach: Also known as the value-added method, it calculates GDP by adding the contributions of each production unit, such as businesses and factories, in the economy.
• Income Approach: This method sums up all the incomes earned by individuals and businesses, including wages, rents, interests, and profits.
• Expenditure Approach: It calculates GDP by summing up all expenditures made in the economy, including consumption, investment, government spending, and net exports (exports minus imports).

Each approach provides a unique perspective on how GDP is assessed and offers a comprehensive view of a nation's economic output.

Net Domestic Product (NDP)

Net Domestic Product (NDP) is derived from GDP by accounting for the depreciation of capital assets. Depreciation represents the wear and tear or loss of value of fixed assets such as buildings, machinery, and equipment over time. NDP gives a more accurate picture of an economy's sustainable output by excluding the portion of GDP that is required to maintain the existing stock of capital.

To calculate NDP, the following formula is used:\[NDP = GDP - ext{Depreciation}\]This adjustment makes NDP a vital measure because it indicates how much of the economic output can be consumed or invested without decreasing future production capabilities. In simpler terms, NDP represents the net production after accounting for capital used up in the production process.

National Income

National Income is a broader concept that reflects the total income earned by residents and businesses within a country over a given period. It includes all forms of compensation such as wages, salaries, profits, rents, and interests. National Income is derived by making further adjustments to NDP, primarily taking into account depreciation and other economic activities such as taxes and subsidies.

The formula to calculate National Income is given by:\[ ext{National Income} = ext{NDP} - ext{Taxes} + ext{Government Transfer Payments}\]Alternatively, it can also be calculated as:\[ ext{National Income} = ext{GDP} - ext{Depreciation} - ext{Taxes} + ext{Government Transfer Payments}\]Understanding National Income is crucial as it provides insights into the economic welfare and prosperity of a country's population. It shows how much income is actually available to households and businesses for consumption and saving, thereby influencing economic planning and decision-making. It is always a lower measure than GDP or NDP due to necessary deductions such as taxes and depreciation.