Difference Between Gross Domestic Product and Net Domestic Product Annual Growth Rates, 1950-2012
April 26, 2013
The Commerce Department has announced that it plans to change its methodology with the next report on the Gross Domestic Product to count research and development and intangibles as investments. This will raise GDP since these expenditures will be counted as a final good rather than a cost of production.
While the idea is sound in principle, there are large methodological problems in implementation. For example, spending that is entirely rent-seeking in nature (e.g. innovating around a patent) will be counted the same as spending that leads to real economic benefits.
A way around this problem is to focus on net domestic product (NDP). The advantage of using the net measure is that it corrects for measurement errors in assessing the value of investment. If we overstate the value as an investment, we also overstate the value of the depreciation, making the net figure close to accurate. And, since we can’t eat depreciation, it is net NDP we care about.
For more, see the latest GDP Byte.