Question

What is the difference between gross private domestic investment and net private domestic investment? If you were to determine net domestic product (NDP) through the expenditures approach, which of these two measures of investment spending would be appropriate? Explain.

Short answer

Depreciation is the difference between the gross domestic private investment and the net domestic private investment. Depreciation deducted from the gross domestic private investment is the net private domestic investment.

The net private domestic investment should be used to determine NDP because NDP is calculated by deducting depreciation from GDP. Since net domestic private investment doesn’t include depreciation, it is a suitable measure to determine NDP

Step-by-step solution

Gross private investment and net private investment

The gross private investment consists of all the goods invested in the economy, including machinery, buildings, and other equipment, and finally, the adding ups to the capital stock of the economy. The depreciation of all these goods is also calculated in the gross private investment.

The net private investment considers the total addition to the capital stock of the country. The depreciation is not considered while calculating the net private investment. Net investment can be considered as the difference between gross investment and depreciation.

Net private investment method will be used for calculating NDP

NDP refers to the annual measure of the goods and services produced in an economy that is calculated by deducting depreciation from GDP. NDP calculates those capital goods that are available for consumption for a long time, like machinery, buildings, etc., and does not include the depreciated capital. Thus, net private investment, which does not include depreciation, is a better tool for calculating NDP.