Given below are two statements: one is labelled as Assertion (A) and the other is labelled as Reason (R).
Assertion (A): Depreciation is deducted from Gross National Product to obtain Net National Product.
Reason (R): Depreciation is the amount a firm actually spends each year on replacing its worn-out machines.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A) is true but (R) is false.
A is true, but R is false. Depreciation is an accounting concept, an annual allowance for wear and tear. No real spending may take place in a given year.
Assertion (A): Depreciation is deducted from Gross National Product to obtain Net National Product. — True. NNP = GNP − depreciation. Wear and tear of capital does not become anybody’s income.
Reason (R): Depreciation is the amount a firm actually spends each year on replacing its worn-out machines. — False. A machine is replaced in bulk only at the end of its life. Each year a part of its value is accounted for, even if no real expenditure is made that year.
NCERT (2026-27): “2.1 SOME BASIC CONCEPTS OF MACROECONOMICS … So, instead of considering a bulk investment for replacement after twenty years, we consider an annual depreciation cost every year. … Notice here that depreciation is an accounting concept. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for. In an economy with thousands of enterprises with widely varying periods of life of their equipment, in any particular year, some enterprises are actually making the bulk replacement spending.” Glossary: “Net National Product (NNP) (at market price) – GNP – depreciation.” |