PROBLEM OF DOUBLE COUNTING

PROBLEMS OR DIFFICULTIES IN THE MEASUREMENT OF NATIONAL INCOME BY VALUE ADDED METHODS

PROBLEM OF DOUBLE COUNTING

While estimating NY  with Value Added Methods. there may arise a problems of double counting , Problem of double counting is the problem of estimation the value of goods and services twice or more than twice.

When a good is producing, it goes in different stages and value of that goods increases at each stage, and  there is always a chance to increase the value of good and increased value may count double in calculation of NY.

Example : - Suppose a farmer produces one quintal of Wheat of Rs.2000/- and sold to a floor mill owner and farmer has no intermediate cost, Flour mill converted wheat into flour and sold to Baker for Rs.3000/- , his intermediate cost is Rs.Rs.1000/- (Rs.3000 - 2000 = 1000/- ) Baker converted that flour into breads and sold to consumers for Rs. 5000/- , so he earned Rs. 3000/- from the sale of the bread.

Wheat for farmers is final good, flour is final product for flour owner and bread is final product for baker.

Gross Value of output = 2000+ 3000+ 5000 = 10000/-

Value of intermediate good is = 0+ 1000+ 3000= 4000

Net Value added = 10000- 4000 = 6000/- ( Rs Six thousands.)

Every producers treat his product final and there are chances that may create a problem of double counting.

How to avoid double counting?

1. (i) Final output methods - Only the value of final goods is to be added in NY. Value of  final output can be calculated by deducting intermediates from the Value of output

2. Value added method: -  Value added method refers to the difference between Value of output and value of IC of each producing units of the country. Sum total of Value added contributed by each level of production by producing units should be added to the National income

     So in the way we can avoid double counting.

THANKS