Answer to Question #107598 in Microeconomics for Amir Hossain

Question

5. Explain the problem of double counting in national income measurement. Discuss with the help of a numerical example how it can be tackled by the value added method.

Answer 1

When estimating the National income, the value of only final goods and services is included. The problem of double counting arises when value of intermediate goods is also included along with the value of final goods.

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.

Value of Output = Rs.400 + Rs.600 + Rs.800 + Rs.900= Rs.2700

Value Added Method:

To avoid the problem of double counting you estimate the total value added at each stage of production.

Rs.400 + Rs.200 + Rs.200 + Rs.100 = Rs.900