In the context of economy, if _____ is deducted from the gross value added to obtain the Net value added obtained.
Show answer & explanation
Correct answer: A
Explanation
The correct answer is Option 1: Depreciation.
Explanation:
- Depreciation serves as the most crucial link for understanding the distinction between 'Gross' and 'Net' concepts within an economy.
- Gross Value Added (GVA): This represents the total value added during the production of a product or service, including the cost associated with the wear and tear of machinery and assets.
- Net Value Added (NVA): When we subtract the cost of wear and tear—or the cost of aging (depreciation)—of the capital goods (such as machinery and equipment) utilized during the production process from the Gross Value Added, we arrive at the Net Value Added.
- Equation:
- Net Value Added (NVA) = Gross Value Added (GVA) - Depreciation
Important Economic Terminology (Quick Revision):
- Gross vs. Net: Whenever converting from 'Gross' to 'Net' figures, depreciation is always subtracted.
- Market Price vs. Factor Cost: To derive the Factor Cost, Net Indirect Taxes (NIT) are subtracted from the Market Price.
- Domestic vs. National: National Product is obtained by adding Net Factor Income from Abroad (NFIA) to the Domestic Product.
Important Questions for Upcoming Examinations:
Question: What is the primary difference between Gross Domestic Product (GDP) and Net Domestic Product (NDP)?
Answer: Depreciation.
Question: By what other name is 'Depreciation' known?
Answer: Consumption of Fixed Capital.