Question

Why government should exclude depreciation and indirect tax from GDP?

Answer 1

Ans. DEDUCTION OF INDIRECT TAX

Indirect taxes are excluded from GDP because market price of many goods includes indirect taxes like sales tax and excise duties etc., which makes the market price of goods different from the price that the seller receives for those goods. So it would be wrong to calculate GDP at market price as GDP is the sum total of the value of all the goods and services produced in country. Thus the concept of factor cost is taken into account which is the amount received by the factors of production that manufactured the good. The market price – Indirect taxes = Factor Cost

DEDUCTION OF DEPRECIATION

Reasons for depreciation of capital goods

1. Capital simple wears out through use. (When forces of nature take their toll and weaken the assets to produce any more) . This would require an
2. Capital breaks down through constant use, accidents or natural disasters.
3. Capital become less productive through technological obsolescence.

Physical capital contribute in economy by producing goods and services, once it stops working or of no use they gets eliminated from the equation and their depreciation cost are subtracted from GDP and to arrive at NDP i.e Net domestic product for the calculation of national income depreciation is deducted