Question

What do you understand by double counting ?

Hint:

The key to understanding double counting is "intermediate goods". To avoid this error when calculating GDP, you must only count the value of final goods or, alternatively, sum up the value added at each stage.

Answer 1

Double counting is an error that can occur when calculating a country's Gross Domestic Product (GDP). It refers to the problem of counting the value of the same good or service more than once in the national income accounts. 
\[\begin{array}{rl} \bullet & \text{The Problem: This error happens when the value of intermediate goods is included in the GDP calculation along with the value of the final good. Intermediate goods are goods used as inputs in the production of other goods.} \\ \bullet & \text{Example: Consider the production of bread. A farmer sells wheat to a miller. The miller sells flour to a baker. The baker sells bread to a consumer.} \\ \bullet & \text{If we simply add the value of the wheat, the flour, and the bread, we would be counting the value of the wheat three times (once as wheat, once as part of the flour's value, and once as part of the bread's value) and the value of the miller's service twice. This is double counting.} \\ \end{array}\] 

The Solution: To avoid double counting, economists use one of two methods: 

\[\begin{array}{rl} 1. & \text{Final Goods Method: Only the market value of the final goods and services (the bread sold to the consumer) is included in GDP.} \\ 2. & \text{Value Added Method: The value added at each stage of production is summed up. (Value added = Value of output - Value of intermediate inputs). In the example, we would add the value added by the farmer, the miller, and the baker.} \\ \end{array}\]