What do you mean by double counting . Why should it be avoided
Answers
Explanation:
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.
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Answer:
The problem of double counting arises when the value of certain goods and services are counted more than once while estimating National Income by Value Added Method. This happens when the value of intermediate goods is counted in the estimation of National Income alongwith the final value of goods and services. Two methods to avoid the problem of double counting:
i. To consider only the final value of output produced.
ii. To consider only the value added of the output produced.