Problem of Double Counting in Value Added Method
PROBLEM OF DOUBLE COUNTING
Example
Suppose in economy,there are 3 person A-B and C
A grows trees
B make plywood out of tree
C makes furniture out of this wookd
What is Value Added by A,B,C?
A --> B -------- > C -------- > Customer
Tree Plywood Furniture
Rs 2000 Rs 5000 Rs 10000
What is National income?
It is total value of goods and services of an economy
=2000+5000+10000
=17000 ---> This Value is wrong
as we have counted double
(Value of intermediate goods is included in value of final goods)
HOW TO AVOID DOUBLE COUNTING?
Example
Suppose in economy, there are 3 person A-B and C
A grows trees
B make plywood out of tree
C makes furniture out of this wood
What is Value Added by A,B,C?
A --> B -------- > C -------- > Customer
Tree Plywood Furniture
Rs 2000 Rs 5000 Rs 10000
Option 1 -Final Output Method
Value of final goods produced =Value of furniture=10000
Option 2-Value Added Method
We calcualte value added by each producer
A B C
Farmer
Value of Output 2000 5000 10000
Intermdiate Goods 0 2000 5000
Value Added 2000 3000 5000
total Value Added = 2000 + 3000 + 5000 = 10000
NCERT Questions
No questions in this part
Other Books
Q1
What is the problem of Double Counting?
Ans
The problem of double counting arises when value of intermediate goods is also included in the value of final goods.
Q2
How to avoid problem of Double counting?
Ans
There are 2 ways to avoid this problem:
1 Final Output Method
In this method the value of final goods is added to determine the national income
2 Value Added Method
In this method, sum total of value added by each producing unit should be taken in the national income.

CA Maninder Singh is a Chartered Accountant for the past 13 years and a teacher from the past 17 years. He teaches Science, Economics, Accounting and English at Teachoo

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