Assertion (A): Double counting leads to lower estimates of
National income.
Reasoning(R): Due to double counting, the value of single
commodity is calculated twice in the national income
measurement.
1) (A) is true but (R) is false.
2) (A) is false but (R) is true.
3) Both (A) and (R) are true and (R) is not the correct
explanation of (A).
4) Both (A) and (R) are true and (R) is not the correct
explanation of (A).
Answers
BOTH 'A' and 'R' are TRUE and 'R' is the correct explanation of 'A'.
Explanation: When using the Value Added Method to estimate National Income, the problem of double counting emerges when the value of particular commodities and services is tallied more than once. This occurs when the value of intermediate items, as well as the final value of goods and services, is included in the assessment of national income.
The problem of double counting leads to an overestimation of any economy's national product. The value of both the final and intermediate items is included, which is incorrect because the final value includes the value of intermediate goods. As a result, goods are overpriced, and the country's financial situation appears to be better than it is.
A farmer, for example, sells rice to a wholesaler for $800 per Kg. The wholesaler sells it to a retailer for $1200 per kg, and the store sells it to clients for $1600 per kg. Due to double counting, the total output will be 3600 per kg, but the final output amount will only be 1600 per kg. As a result, there will be a discrepancy in the results.
THEREFORE, It has a major impact on the economy because the GDP of a country is determined on the value of commodities, and if there is double counting, the commodity's value will be higher than it should be, causing the domestic product to be higher than it should be and acting as a money multiplier.