The problem of Double Counting
The counting of the value of a commodity more than once is called double-counting. The problem of double counting leads to an overestimation of the value of goods and services produced. Thus, the importance of avoiding double-counting lies in avoiding overestimating the value of domestic products.
For example, a farmer produces 5 kg of wheat and sells it for Rs. 400 in the market to a flour miller.
A flour miller sells it for Rs. 600 to the baker.
The baker sells it in the form of bread to the shopkeeper for Rs. 800.
The shopkeeper sells the entire bread to the final consumer for Rs. 900.
Here, Value of Output = 400 + 600 + 800+ 900 = Rs. 2700
But the value of wheat here is counted 4 times, the value of output by the miller is counted 3 times. The value of output by the baker is counted twice. The counting of the value of the commodity more than once is called the problem of double-counting.
Here, Value- added = 400 + 200+200+100 = 900, this should be included in the national income.
To avoid the problem of double counting 2 method are used which are:
Final Output Method
According to this method, the value of intermediate goods is not considered. Only the value of final goods and services is considered. For example, the value of final goods that is bread is Rs. 900, which will be included in the calculation of national income.
Value added method
The total value added at each stage of production is considered. For example, the value-added at each stage of production is added, 400 + 200+200+100 = 900.
You can read the related post on national income:
Precautions while calculating the national income
Domestic territory and national residents
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