Question

Explain the 'Final Good Approach' to avoid double counting of goods and services in the estimation of National income.

Answer 1

The counting of the value of commodity more than once is called double counting. This leads to over estimation of the value of goods and services produced. Thus, the importance of avoiding double counting lies in avoiding over estimating the value of domestic product, e.g. a farmer produces one tonne of wheat and sells it for Rs.400 in the market to a flour mill.
The flour mill sells it for Rs. 600 to the baker. The baker sells the bread to the shopkeeper for Rs. 800. The shopkeeper sells the entire bread to the final consumer’s for Rs.900. Thus,
Value of Output = Rs. (400 + 600 + 800 + 900)
= Rs.2700
In fact, the value of the wheat is counted four times,
. the value of services of the miller thrice and the value of services by the baker twice.
In other words, the value of wheat and value of services of the miller and of the baker have been counted more than once. The counting of the value of. commodity more than once is called double counting.
To avoid the problem of double counting, following two methods are used:
(i) 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. In the above example, the value of final goods, i.e. bread is Rs. 900.
(ii) Value added method Another method to avoid the problem of double counting is to estimate the total value added at each stage of production. In the above example, the value added at each stage . of production is Rs. (400 +200 +200 +100)
= Rs. 900.

Answer 2

Explanation of the 'Final Good Approach' to avoid double counting of goods and services in the estimation of National income is as follows:

• By the sum of purchased and produced product, GDP can be measured.
• For more than one time, the output value should be added to the GDP to  avoid double counting.
• In the chain of production, value of intermediate goods are not counted  but GDP only count goods and service's final output.
• In case of making a blouse, GDP will not include the cost of the making cloth.