GDP at factor cost= Net value added + Depreciation. Here my question is why depreciation added to Net value added? I am confused here: Net value added = Gross value added - depreciation; so the above formula becomes GDP at factor cost= Gross value added - depreciation + Depreciation. Here depreciation get cancelled and finally becomes GDP at factor cost= Gross value added.enter image description here Source: http://www.economicsdiscussion.net/national-income/components-national-income/top-17-components-of-national-income/18793

  • $\begingroup$ Hi @Nandy, welcome! Where do your definitions come from? $\endgroup$ – emeryville Aug 17 '19 at 7:48
  • $\begingroup$ economicsdiscussion.net/national-income/… $\endgroup$ – Nandy Aug 17 '19 at 8:04
  • $\begingroup$ It's in Component # 2. GDP at Factor Cost $\endgroup$ – Nandy Aug 17 '19 at 8:05
  • $\begingroup$ ok, I edited my answer. Note that this source gives GDP at Factor Cost = GDP at Market Price – Indirect Taxes + Subsidies, which is consistent with my answer $\endgroup$ – emeryville Aug 17 '19 at 8:25
  • $\begingroup$ If you found the answer helpful, please consider accepting it using the check-mark. $\endgroup$ – emeryville Aug 17 '19 at 8:36

The best practice would be to use definitions from recognized international institutions such as the World Bank or the Organisation for Economic Co-operation and Development (OECD). In this document The OECD classifies three types of gross value added (1) at basic prices, (2) at producers' prices and (3) at factor cost.

Let first define gross value added at basic prices as output valued at basic prices less intermediate consumption valued at purchasers' prices. Then, gross value added at factor cost can be derived from gross value added at basic prices by subtracting other taxes less subsidies on production.

As an example, GDP at market prices for the United States in 1992 was US\$ 6,234 billion. As GDP at factor cost removes all net taxes on production, it would equal \$6,234 billion less \$506 billion or \$5,728 billion.

GDP at factor cost is thus a way of measuring gross value added at some prices. So, as far as I understand, it makes sense that depreciation get cancelled and finally becomes GDP (at factor cost) = Gross value added (at factor cost).

Why is depreciation added to Net value added? According to your source, if we deduct depreciation from Gross Net Product (at factor cost), we get Net National Product (at factor cost). So, if we add depreciation to NNP we get GNP.


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