Question

Explain the problem of double counting in estimating national income, with the help of an example. Also explain two alternative ways of avoiding this problem.

Answer 1

Counting the value of goods or services more than once while estimating NI is the problem of double counting.
Example : Suppose, a farmer produces wheat worth Rs. 1,000. He sells this to the baker who converts the wheat into bread and sells it to the grocer for Rs. 2,000. The value of total output here would be Rs. 3,000 and this includes the value of wheat two times.
Methods of avoiding double counting are :
(a) Value of final goods only to be included.
(b) Use value added method.