Embedded in this human capital is what might be called the
stock of knowledge and technology---an understanding of how the
world works and of how to produce goods and services using the
mix of human and physical capital available to the community.
This knowledge must be possessed by, or accessible to, somebody
in the economy to be treated as part of the communities' capital
stock.
Most components of the capital stock have a tendency to wear
out with the passage of time. This is obvious with respect to
your clothes or your car---clothes wear thin and tear, and cars
rust from the road salt and develop wear on the tires, breakshoes,
engine and transmission. The amount of car services you get
from your car will thus tend to decline through time as the car
gets older. This means essentially that unless expenditures are
made to maintain the car in mint condition your stock of
"automobile capital" will get smaller as time passes. And,
as noted, that smaller stock of capital will yield a smaller flow
of services.
Human capital may or may not deteriorate with time. Your
knowledge of algebra will fade if you do not use it, but skills
you use every day will not deteriorate---in fact, they will
improve. Even if nobody ever forgets anything, societies' stock
of human capital will be reduced when people die. To keep the
economy's stock of human capital from deteriorating through
time, the young must be educated to replace the skills lost when
the old die.
Some types of physical capital---natural resources, for
example---do not deteriorate with time but become depleted as
they are used up. Once burned, coal and oil are gone forever.
The world stocks of coal and oil reserves will therefore necessarily
fall through time.
If society is to keep its aggregate stock of capital (the
aggregate is the sum of the stocks of capital of all types) from
declining through time, it must build new capital stock to replace
that which wears out, dies, or is depleted. The amount of goods
which must be diverted to maintain the capital stock is called
the allowance for depreciation or, simply, depreciation. Depreciation
is the flow of additions to the capital stock necessary to
keep it constant in the face of wear and tear and depletion.
After allowance has been made for depreciation, only a portion of
the current final output from the economy's capital
stock is available for use. The amount of output available
after provision for maintaining the capital stock intact is
called income. Income is thus equal to output minus depreciation,
or the amount that society could consume in any given period and still
maintain constant its stock of capital and its ability to produce
output and income for consumption in the future.
The relationship between output, depreciation and income
can be presented in the form of a simple equation as follows:
We have seen how the level of output can be viewed as the
flow of returns off the economy's stock of human and physical
capital. Physical capital, it will be recalled, consists of
machinery, buildings, land, inventories, clothing, and so forth.
Human capital consists of the whole range of human skills and
human knowledge possessed by the population as well as such
things as work habits, attitude, etc. It is important to note
here that the total output flow is the output of final
goods---intermediate goods are simply inputs into the process
of producing the goods that are ultimately consumed or added to the
capital stock.
where X refers to the level of output, Y to the level of income and D to the amount of depreciation.
In the national accounting statistics collected and published by the government, the aggregate (i.e. total) final output flow from domestically employed capital is referred to as Gross Domestic Product (GDP) and the flow of final output from domestically owned capital is referred to as Gross National Product (GNP). And the level of aggregate income produced by domestically employed capital is referred to as Net Domestic Product and Net National Product is level of aggregate income produced by domestically owned capital. If residents of the country own no capital in other countries and none of the domestically employed capital is owned by foreigners, Domestic Product and National Product will be the same thing. The difference between the Gross and the Net values is the allowance for depreciation.
You should now be ready to take a test on your understanding of
what is meant by output, income, depreciation, Gross National Product,
Gross Domestic Product, Net National Product, and Net Domestic Product.
While detailed answers are available on-screen for all questions, you
should think about the question and construct your own answer before
going to the one here provided.
Question 1
Question 2
Question 3
Question 4
Choose Another Topic in the Lesson