To arrive at the value of Net Value Added at Market Price (NVAMP), ____ must be ____ to/from Gross Value Added

Question 57 of 75

Q. To arrive at the value of Net Value Added at Market Price (NVA_MP), ________ must be ________ to/from Gross Value Added at Market Price (GVA_MP). (Choose the correct option to fill in the blanks) (A) depreciation, added (B) depreciation, subtracted (C) net indirect taxes, subtracted (D) net indirect taxes, added

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Concept understanding — Depreciation Calculation

Depreciation Calculation – A First Look

You own a smartphone you bought for ₹30,000. After a year, if you tried to sell it, you’d get maybe ₹20,000. That ₹10,000 drop isn’t a loss of cash from your pocket — it’s the wear and tear of the phone’s value. In economics, when a factory buys a machine for ₹10 lakh, that machine doesn’t stay worth ₹10 lakh forever. It rusts, breaks down, becomes outdated. The gradual loss in value is depreciation.

The Precise Meaning

In your NCERT Class 12 Macroeconomics textbook (Chapter 2, National Income Accounting), depreciation is defined as:

Depreciation is the fall in the value of a fixed asset due to normal wear and tear, passage of time, or expected obsolescence.

It is not a cash expense — no money leaves the firm when depreciation happens. But it is a cost that must be accounted for, because using a machine today reduces its future usefulness. Without depreciation, a firm would overstate its profit and a country would overstate its national income.

Why It Matters

For a firm: Depreciation is subtracted from revenue to find true profit. If you ignore it, you think you earned more than you really did.
For the economy: Gross Domestic Product (GDP) counts all final goods produced. But some of that production is just replacing worn-out machines. Net Domestic Product (NDP) = GDP – Depreciation. NDP tells us how much new value was actually added.

The Formula (NCERT Standard)

The NCERT textbook gives one standard method for calculating depreciation — the Straight Line Method. It is simple and exam-relevant.

\text{Depreciation} = \frac{\text{Cost of Asset} - \text{Scrap Value}}{\text{Estimated Life of Asset}}

Where:

Cost of Asset = purchase price + installation/transport costs (the total initial investment)
Scrap Value = the estimated resale value at the end of its life (could be zero)
Estimated Life = number of years the asset is expected to be used

Example: A machine costs ₹1,00,000, has a scrap value of ₹10,000, and a life of 10 years.

\text{Depreciation per year} = \frac{1,00,000 - 10,000}{10} = \frac{90,000}{10} = ₹9,000

Each year, the firm records ₹9,000 as depreciation. After 10 years, the machine’s book value becomes ₹10,000 (the scrap value).

A Word on Other Methods …

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Net Value Added at Market Price (NVA_MP) is simply Gross Value Added at Market Price (GVA_MP) minus the consumption of fixed capital (depreciation). The correct fill is "depreciation, subtracted."

The relationship between gross and net value added is one of the most fundamental accounting identities in national income. Think of it this way: when a firm produces output, its machinery, buildings, and equipment wear out over time. That wear and tear — depreciation — is a real cost of production, even though no cash leaves the firm in that period. Gross Value Added counts the total value of output before accounting for this capital consumption. Net Value Added, on the other hand, gives us the fresh value created in the period — the output that remains after setting aside enough to replace the worn-out capital.

So the bridge between the two is straightforward:

\text{NVA}_{\text{MP}} = \text{GVA}_{\text{MP}} - \text{Depreciation}

Depreciation is subtracted from the gross figure to arrive at the net figure. This is true whether we are talking about market price or factor cost — the subtraction of depreciation is always the step that converts gross to net. …

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