Explain the problem of double counting in estimating national income, with the help of an example. Also explain two alternative ways of avoiding the problem.

Explanation

The counting of the value of commodity more than once is called Double Counting. This leads to overestimation of the value of goods and services produced. Thus, the importance of avoiding double counting lies in avoiding overestimating the value of domestic product
For example, a farmer produces one ton 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 to the bread shopkeeper for Rs.800. The shopkeeper sells the entire bread to the final consumers for Rs.900. Thus, Value of Output = Rs.400 + Rs.600 + Rs.800 + Rs.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 two methods are used: (i) Final Output Method, and (ii) Value Added Method.
(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 + Rs.200 + Rs.200 + Rs.100 = Rs.900