Net domestic product accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration.
[3] The portion of investment spending that is used to replace worn out and obsolete equipment — depreciation — while essential for maintaining the level of output, does not increase the economy’s capacities in any way.
If GDP were to grow simply as a result of the fact that more money was being spent to maintain the capital stock because of increased depreciation, it would not mean that anyone had been made better off.
[4][5] If the country is not able to replace the capital stock lost through depreciation, then GDP will fall.
In addition, a growing gap between GDP and NDP indicates increasing obsolescence of capital goods, while a narrowing gap means that the condition of capital stock in the country is improving.