Net Domestic Product: Definition & Formula

Instructor: Adam Gifford
In this lesson, we will discuss a method that is used to measure the health of an economy known as the net domestic product. We will define the concept, analyze its components and review the formula used to determine net domestic product.

Introducing Net Domestic Product

Cameron purchased a new refrigerator nine years ago for only $1,000. Today, Cameron is purchasing a new refrigerator and selling his old one. He hoped to sell his old one for the original purchase price. However, no one is willing to pay $1,000 for a 9-year old, beat-up refrigerator. Cameron is forced to bring his old refrigerator to the recycling center for disposal. Now, it may be obvious to you why no wants to pay so much for Cameron's old refrigerator. The motor is old, the refrigerant is low and the value has depreciated considerably over time.

Refrigerators lose value over time. So do cars, windows, computers and parachutes, among many other goods. This fact is something that economists use to determine the net domestic product of a country. The net domestic product is a country's economic output that has been adjusted for the amount of that output that has been consumed.

The net domestic product answers the question, 'How much are the capital goods of a given country currently worth?'

Factors of Net Domestic Product

In order to determine the net domestic product of a country, you will need to know two variables.

The first variable is the gross domestic product, which is the total economic output of a country. The total economic output includes the value of the goods that consumers purchase, the value of goods that the government purchases, the value of investments that businesses make and the amount of goods that are exported from a country.

The second variable is the amount of depreciation on the country's economic output, which is the reduction in value of a good due to age. The refrigerator in our original example was no longer worth $1,000 because of the depreciation that occurred over its nine-year lifespan. All physical goods are subject to depreciation.

Calculating Net Domestic Product

Now that you have the two factors that are needed to determine net domestic product, you can plug them into the formula. In this formula we will let:

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