Suppose, the Gross Domestic Product (GDP) at market price of a country in a particular year was ₹ 1,100 crore.

Question 45 of 75

Q. Suppose, the Gross Domestic Product (GDP) at market price of a country in a particular year was ₹ 1,100 crore. Net Factor Income from abroad was ₹ 100 crore. The value of Net Indirect Taxes was ₹ 150 crore and the National Income was ₹ 850 crore. Calculate the value of depreciation for the economy.

Nagaland NbseCBSE Class XII Board 2023Subjective· 3mImportance★★★★★

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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 It rusts, breaks down, becomes outdated.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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To find depreciation, we trace the path from GDP at market price through GNP, NNP at market price, and NNP at factor cost (National Income), isolating the consumption of fixed capital that separates gross from net measures. Depreciation = ₹ 200 crore.

Depreciation—formally called consumption of fixed capital—measures the wear and tear on the economy's capital stock over the year. Machinery rusts, buildings age, vehicles break down; this erosion of productive capacity must be subtracted from gross investment to arrive at net investment, and from gross domestic product to arrive at net domestic product. The question hands us GDP at market price and National Income (which is NNP at factor cost), so we need to walk backward through the national income accounting identities to isolate the depreciation wedge.

The chain of identities runs as follows. Start with GDP at market price. Add Net Factor Income from Abroad (NFIA) to convert the domestic concept into a national one—that gives us GNP at market price. Subtract depreciation from GNP at market price to get NNP at market price (the net national product still valued at market prices, inclusive of indirect taxes). Finally, subtract Net Indirect Taxes (NIT) to strip away the tax wedge and arrive at NNP at factor cost, which is National Income by definition.

\text{National Income} = \text{GDP at market price} + \text{NFIA} - \text{Depreciation} - \text{NIT}

Rearranging this identity to solve for depreciation:

\text{Depreciation} = \text{GDP at market price} + \text{NFIA} - \text{NIT} - \text{National Income}

Now substitute the given values step by step.

Step 1: GDP at market price = ₹ 1,100 crore.

Step 2: Add NFIA = ₹ 100 crore.

\text{GDP at market price} + \text{NFIA} = 1{,}100 + 100 = 1{,}200 \text{ crore}

This is GNP at market price. …

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