(a)OR(b)

Discuss briefly the problem of ‘Double Counting’, using a suitable example.

Counting the value of a good or service more than once while estimating National Income by the value added method is called the problem of double counting.

This may be illustrated with the following example:

Suppose a farmer produces $\displaystyle 50$ kg of wheat and sells it for ₹ $\displaystyle 500$ to a flour mill owner. If the intermediate cost for the farmer is assumed to be zero, then the value added will be ₹ 500. For the flour mill owner, wheat is an intermediate good which is converted into flour and sold for ₹ $\displaystyle 700$ to a baker. For the baker, flour becomes an intermediate product which is converted into bread and sold to the final consumers for ₹ $\displaystyle 1,000$ as the final product.

In the given example, wheat is a final product for the farmer, flour for the flour mill owner and bread for the baker. However, the value of wheat is included in the value of flour as well as in the value of bread. As a result, the value of wheat and flour are counted more than once. This causes the problem of double counting.

Real Gross Domestic Product (GDP) is the money value of final goods and services measured at base year prices, whereas Nominal Gross Domestic Product (GDP) is the money value of final goods and services measured at current year's prices.

For example, suppose a country produces only one product. In the year $\displaystyle 2000$ it had produced $\displaystyle 100$ units which were sold at ₹ $\displaystyle 10$ per unit, so GDP at current price for the year $\displaystyle 2000$ was ₹ $\displaystyle 1$,000. In $\displaystyle 2001$, the same quantity is produced but is sold at ₹ $\displaystyle 15$ per unit.

In this case the Nominal GDP in $\displaystyle 2001$ was ₹ $\displaystyle 1,500$ (= $\displaystyle 100$ × ₹ $\displaystyle 15$), however the Real GDP (in $\displaystyle 2001$) will be ₹ $\displaystyle 1,000$ (= $\displaystyle 100$ × ₹ $\displaystyle 10$).