What is the problem of Double Counting? Explain with examples. Does it arise in income method as well? How do you avoid it?

Double counting in accounting is an error whereby a transaction is counted more than once. For example, the costs of intermediate goods used by a business to produce a finished good are included in the computation of a nation’s gross domestic product.

Since the final price of a good already includes the value of all the intermediate goods used to produce it, including the price of intermediate goods when calculating gross domestic product would involve double counting. Double counting seriously overstates gross domestic product.

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Take the example of the production of a product  like Wacky Willy Stuffed Amigos. Stuffed Amigos have three primary material inputs or intermediate goods, fabric, thread and stuffing. The fabric is 100 per cent cotton, produced by Omni Textiles.

The thread is a cotton-polyester blend, produced by Mega Thread. And the stuffing is a gelatinous substance produced using soybean extract, graphite, and recycled newspapers by a firm called Ooze. In addition to these intermediate goods, The Wacky Willy Company also uses the four basic factors of production labor, capital, land, and entrepreneurship.

The expense of these resources in the production of stuffed amigos is not particularly important at the present. What is important is the market transactions for the intermediate goods. If the government added all market transactions, it would be overstating the value associated with the production of this stuffed amigo. If the government does this for all production, it would seriously over estimates the actual value of production during the year.

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It happens in income method also because national income estimate total economic activity, including GDP, gross national product, net national income, and adjusted national income. All are especially concerned with counting the total amount of goods and services produced within some boundary. The boundary is usually defined by geography or citizenship, and may also restrict the goods and services that are counted.

Double counting can be avoided. In order. to avoid double or multiple counting, only final goods and services should be included in GDP. However, this should not be regarded as meaning that the farmer or the miller or the baker has not contributes anything to GDP. In fact, their contributions are already included in the value of the final product. Their individual contributions to GDP can be worked out by the,value added method which is the same as the value-of final product.

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