Question

Answer the following question.
Define the problem of double counting in the computation of national income. State any two approaches to correct the problem of double counting.

Answer 1

Double counting refers to a situation where the value of a good is taken into account (counted) more than once. Such a problem occurs because, for every producer, the commodity he sells is the final commodity. Thus, if every time the value of the good is taken into account, then it will lead to the estimation of the value of the product more than once.
For instance, in the example of the production of cloth, for the cotton farmer cotton is the final product and he sells it for Rs 500. Thus, for him, the cost of the final output is Rs 500. Similarly for the weaver, who sells weaved cotton for Rs 700, weaved cotton is the final product, and the cost of the final output is Rs 700. Next, the textile producer converts the weaved cotton into cloth and sells it to the retailer for Rs 900, for him the cloth is the final product, and the cost of the final output is 900. The retailer then sells the cloth for Rs 1100.
The total value of the final output in the process is Rs 3,200 (i.e. Rs 500 + Rs 700 + Rs 900 + Rs 1,100). But, in this manner, the value of cotton is counted four times, the value of thread three times, and that of cloth twice.
In other words, there is an overestimation of the value of the goods produced.
Efforts must be taken to reduce double counting by the following two approaches:

1. By considering only the value added by each production unit
2. By considering only the final goods and services (i.e. excluding intermediate consumption) in the estimation of the national income.