“Net national product or national income at market prices is the net market money value of all the final goods and services produced in a country during a year.
It is found out by subtracting the amount of depreciation of the existing capital in a year from the market value of all final goods services”.
For a continuous flow of money payments, a certain amount of money must be set aside from the gross national income for meeting the necessary expenditure of wear and tear of all capital equipment so that there should not be any deterioration in the capital and it should remain intact.
If we deduct depreciation allowance from the gross national product, we get Net National Product at the current market price.
The formula for Net National Product/National Income:
NNP at Market Price = GNP at Market Price – Depreciation
Depreciation Allowance and Maintaining Capital Intact:
Here a question can be asked as to what we mean by depreciation allowance and maintaining capital intact; (the words which we have used in explaining NNP).
Depreciation Allowance
It is known to everyone that when production is going on, the value of capital equipment does not remain the same.
A decrease in value because of wear and tear through use, rusting, accident, or through actions of elements, gradually takes place in the building and other equipment of business.
A certain sum of money based on the value of the capital equipment and its longevity is set aside every year from the gross annual income so that when machinery is worn out, new capital equipment can be set up from the sum of accumulated money.
This fund, which is set aside for covering the wear and tear, deterioration, and obsolescence of the machinery, is called a Depreciation Allowance.
We can make this concept clearer by taking a simple example.
Example
Suppose, a person buys machinery for manufacturing cloth for 10,000$ only. He expects that this machinery will properly work for ten years and after that period; it will be partially or completely worn out.
He sets aside 1,000$ every year from the gross national income as a depreciation reserve for the capital equipment.
After the expiry of ten years, he accumulates 10,000$, and with that money, he replaces the old capital equipment which has lived its useful life and maintains capital intact.
The sum of money, i.e., 1,000$ which he annually deducts from the gross annual income, is known as a depreciation allowance.
It is often pointed out by economists that the calculation of depreciation allowance every year is a difficult task.
For example, a person expects the longevity of the capital equipment, say for ten years. There is a possibility that machinery may last longer or it may go out of use earlier.
So, they say what is needed is an approximate decision regarding the depreciation allowance. This decision should be based on a high degree of judgment and guessing about the future.
Maintaining Capital Intact
By maintaining capital intact we do not mean that capital equipment should remain the same. It should neither increase nor decrease. This can only be possible in a static society.
In a progressive society, the total capital equipment of a country must increase every year, otherwise, the national income will be affected adversely.
In Economics, the phrase ‘maintaining capital intact‘ is meant to make good the physical deterioration that has taken place in the capital equipment while creating income during a given period.
This can only be made by setting aside a certain amount of money every year from the annual gross income so that when the income-creating equipment becomes obsolete, new capital equipment may be created.
If the depreciation allowance is not set aside every year, the flow of income will not remain intact. It will decline gradually and the whole country will become poor.
