Double Counting problem:
Double Counting means count all value of a good till it became final goods. We can easily understand it by following table:
Stage of production| Sales value| Value added|
Farmer| Tk.125| Tk.125|
Baker| Tk.170| Tk.45|
Restaurateur| Tk.200| Tk.30|
If we add up all these transactions we have Tk.595. which is considerably greater than the value of the final product of Tk.200. the reason the former measure gives an over-estimate of GDP is that the value wheat is already included in the flour sold to the baker, and the value of flour is included in the cake sold to the restaurateur.
Therefore, adding up all transactions entails double counting.
How to overcome:
In order to avoid double or multiple counting, only final goods and services are included in GDP. The final good is the example above, is the cake bought by the final consumers, and consequently only their expenditure (on cake) is part of 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.
In estimating GDP using the production approach, if we had added the market value of the products of all industries we would have considerably over-estimated GDP, since part of the output of each industry can be used as intermediate inputs in the production processes of other industries. Double counting is avoided by deducting the cost of all intermediate inputs from the market value of the output of each industry.
The ABS measures GDP using also the value-added, or production, approach which is based on the...