Question

“Problem of Double Counting leads to overestimation of output in an economy.”
Justify the given statement with the help of suitable example.

Hint:

To avoid overestimation in national income, always exclude intermediate goods and focus only on final goods and services.

Answer 1

Yes, the problem of double counting can result in overestimating the total output or income of an economy. Double counting occurs when the value of intermediate goods is counted along with the value of final goods during national income estimation. 
Why it's a problem: 
Intermediate goods are those goods that are used up in the production of final goods (e.g., raw materials, components). 
Final goods are those which are ready for final consumption or investment and include the value of all intermediate goods. 
Counting both intermediate and final goods leads to including the value of intermediate goods multiple times, hence inflating national income figures. 
Example: 
A farmer sells wheat for ₹ 100 to a baker. 
The baker uses the wheat to produce bread and sells the bread for ₹ 150. 
If we count both the wheat and the bread, the total output becomes ₹ 250, which is incorrect. 
The correct value of output is only ₹ 150 — the value of the final good (bread), as it already includes the cost of wheat. 
Conclusion: To avoid this issue, only the value of final goods and services should be included in national income accounting.