Double counting suggests counting of the value of the exact same product (or expenditure) even more than when. How?
According to output strategy (an different method to worth included method) of calculating national revenue, value of just last goods and also services created by all the manufacturing devices of a country in the time of a year need to be counted. In various other words, worth of intermediate goods which enter right into last products (e.g., paper supplied in printing of books, raw cotton supplied in apparel, wheat provided in making bread, and so on.) need to not be taken right into account.
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But in actual practice, while taking worth of last products, worth of intermediate products likewise gets included bereason every producer treats the commodity he sells as final product ircorresponding of whether it is supplied as intermediate or last great. For instance, while taking worth of final items favor cycles, the worth of tyres, tubes, frames, bells, etc. (intermediate goods) used in manufacturing these cycles likewise gets contained inadvertently
In this way particular items are counted even more than when leading to over-estimation of nationwide product to the degree of the worth of intermediate products had. This is referred to as the problem of double counting which means counting worth of the same commodity even more than once.
This can be described additionally through the assist of an instance. Let us for the sake of convenience and understanding, presume that in an economy, tright here are just four manufacturing units (or firms) involved in manufacturing of clothes (ready-made clothing choose shirts, pants, etc.).
Firm A produces raw cotton, assuming though unrealistically that it supplies no intermediate inputs and sells it for Rs 1,000 to firm B. Firm B converts it right into cotton yarn and sells it for Rs 1,500 to firm C. Firm C manufactures cotton fabric and also sells it for Rs 2,200 to firm D. Firm D produces apparel and sells them for Rs 3,500 to final consumers.
The complete value of all these transactions or gross output is Rs 8,200 (= 1,000 + 1,500 + 2,200 4- 3,500) in which raw cotton has actually been counted four times, cotton yarn three times and also cotton fabric two times. On the contrary, worth of final items (garments) which the economic situation has produced is t 3,500. Thus, while calculating nationwide revenue, if we take into account Rs 8,200 (worth of last and also intermediate goods), it will certainly be a instance of double counting and duplication.
Actually only Rs 3,500 must be counted since the economic climate has developed last goods worth Rs 3,500 and also not worth Rs 8,200. It is, therefore, necessary that the facet of double counting erupting in final product approach need to be avoided. The problem of double counting is fixed by Value added approach according to which chances of double counting are instantly got rid of.
(b) How to avoid Double Counting:
Theoretically, we might say that tright here may be 2 different ways of staying clear of double counting, namely, (i) final product method and (ii) value included technique. But in actual practice, double counting still occurs unpurposely in final product strategy bereason eincredibly producer treats the product he sells as a last product though the very same could have been offered by the buyer as an intermediate product.
Because of this this trouble is perfectly resolved by value included technique. According to this method, instead of taking value of last commodities, value included by each firm at each stage of manufacturing is consisted of.
In various other words, price of intermediate goods or raw material supplied by a firm in making a product is excluded and also only the value added at each stage of manufacturing by eexceptionally creating enterpincrease (firm) is contained. The worth included is found out by subtracting the value of inputs (intermediate products which enter into last goods) from the worth of output (final goods) of a firm.
In the over instance, worth added by each firm will be as follows:
Clbeforehand, value added by all the four firms is Rs 3,500 making up Rs 1,000 by A + Rs 500 by B + Rs 700 by C + Rs 1,300 by D. There is no scope for double counting in this method. Therefore, to stop double counting, the worth included technique, additionally recognized as industry of beginning approach, is used in computation of nationwide earnings. It is worth pointing out that full worth included is equal to worth of final product.
See more: For The Composite Method, The Composite, Composite Depreciation
In the over instance, total value added is Rs 3,500 and also the value of final product (final clothing sold to consumers) is additionally Rs 3,500. (That is why in manufacturing technique tbelow deserve to be two ideologies. Final product strategy and also Value included approach.) Mind, in the above instance, depreciation and also net indirect taxes are assumed as zero through the result that value included is in fact net worth added at FC.
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