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Why does the "income method" count depreciation?

Question:

Why does the "income method" count depreciation?

Gross Domestic Product (GDP)

: Gross Domestic Product (GDP) measures the market value of all the final goods and services produced within the country in a given period of time. It is the most useful method of comparing the economic growth of the country.

Answer and Explanation:

Income method focuses on capital income received from factors of production like labor and land. Income method measures Net Domestic Product at factor cost. In order to calculate Gross Domestic Product at market prices, depreciation must be added to Net Domestic Product at factor costs. While calculating net domestic product, depreciation of capital is subtracted. GDP does not give a correct measure of economic growth. So, depreciation must be subtracted from it in order to obtain a better measure.


Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
58K

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