Gross domestic product (GDP) is considered a key measure of economic performance. It is a reference point for economic policy debates, debt rules, government spending ratios, and discussions on distribution. But what if this key indicator systematically paints too positive a picture? Empirical findings suggest that this is increasingly the case.
The blind spot of gross domestic product
GDP measures the sum of all value produced in an economy. It also includes investments that merely offset the wear and tear on capital stock, i.e., depreciation. These amounts count toward GDP, but are not available to pay wages, distribute profits, or finance government services without eroding economic substance.
This is where net domestic product (NDP) comes in: it deducts depreciation from GDP and thus measures the income that is in fact available for distribution in a given year. For a long time, this difference played hardly any role in public debate. But that harbors dangers.
The growing gap between GDP and NDP
A clear trend has emerged in Germany since reunification. The share of depreciation in GDP has risen significantly: from 11.2 percent in 1970 to 15.6 percent in 1991 and to over 20 percent in 2024. This means that an ever-increasing proportion of what is counted as economic output is merely used to maintain the capital stock. The following figure illustrates the development since reunification.
Note: Own calculations based on data from the German Federal Statistical Office (https://www-genesis.destatis.de).
While real GDP grew by approximately 48 percent between 1991 and 2024, real NDP increased by only approximately 39 percent. This has serious consequences. On average, the nominal annual growth of NDP was just under 0.2 percentage points below that of GDP. In other words, actual distributable income grew noticeably slower than the GDP figures suggest.
Why are depreciations increasing?
Several factors contribute to this development. First, the structure of investment has changed. Since the introduction of the European System of Accounts (ESA) in 2010, expenditure on research and development has been recorded as investment and increases GDP. These intangible assets typically have a shorter life span than traditional fixed assets and are therefore depreciated more quickly.
Second, relative price developments play a role. In national accounts, depreciation is valued at replacement prices. If prices for capital goods, such as in construction, rise faster than the general price index, this automatically increases the share of depreciation in GDP. This effect has been particularly noticeable in Germany since 2011.
Distorted ratios, distorted debates
The growing gap between GDP and NDP becomes particularly problematic where GDP serves as a benchmark for key economic policy ratios. Debt ratios, public expenditure ratios, and social expenditure ratios then convey a picture that underestimates the actual burden on the economy.
An example: at the end of 2024, Germany's debt ratio measured against GDP was around 59 percent. Measured against NDP, however, it was almost 75 percent. The difference is similar for the public spending ratio: instead of just under 50 percent based on GDP, the figure based on NDP is over 62 percent. The extent of government activity is therefore significantly greater when measured in terms of the income that can actually be distributed.
Not a problem specific to Germany
The rising share of depreciation is not a phenomenon unique to Germany. Many wealthy OECD countries are seeing a similar trend in international comparison. In the US, Canada, Japan, and Switzerland, the significance of depreciation has also increased.
Accordingly, debt ratios also diverge depending on whether they are based on GDP or NDP. In many Western European countries, the NDP-based debt ratio is growing faster than the conventional GDP ratio, a circumstance that has so far been largely ignored in fiscal policy rules.
Time for a change of perspective?
Criticism of GDP as a measure of prosperity is nothing new. The Stiglitz-Sen-Fitoussi Commission already recommended focusing more on net figures. The findings discussed here lend new weight to this demand. If the proportion of depreciation rises systematically, GDP not only overestimates income growth, but also distorts debates on distribution and sustainability.
This does not mean that GDP is obsolete as an economic indicator. It remains a good measure of short-term fluctuations and capacity utilization. However, when it comes to issues of distribution, public finances, and long-term welfare development, there is much to be said for paying much more attention to NDP.
We calculate ourselves to be richer than we are. The growing importance of depreciation means that GDP increasingly overestimates actual economic performance and available income. This effect may influence the pricing of government bonds by financial market players and could lead to higher risk premia. Current benchmarks such as debt/GDP are linked to gross growth, yet government repayment capabilities should rather depend on net incomes. Country-specific developments in depreciation as percentage of GDP may also call the cross-country comparison of debt sustainability into question. Anyone discussing distribution margins, public expenditure ratios, or fiscal sustainability should not ignore this development. A stronger focus on net domestic product can help make economic policy debates more realistic and informed.
Literature: Alfons J. Weichenrieder (2026), Abschreibungen und die wachsende Kluft zwischen Brutto- und Nettoinlandsprodukt, erscheint in: Perspektiven der Wirtschaftspolitik.
Alfons J. Weichenrieder is Professor of Economics and Public Finance at Goethe University Frankfurt.
Blog entries represent the authors’ personal opinion and do not necessarily reflect the views of the Leibniz Institute for Financial Research SAFE or its staff.
