Question
Define double counting. How can the problem of double counting be avoided?
The problem of double counting is solved by value added method. Theoretically to avoid double counting there may be two alternative ways:
Final Product Approach: According to this, value of only final products, i.e. which go for final consumption or capital formation should be included. But in practical application of this approach double counting still creeps in as every producer treats the product he sells as final whereas the same might have been used as intermediate product by the buyer.
Value Added Approach: Value added method is most effective in avoiding double counting. According to this, instead of taking value of final goods, only value added at each stage of production by a producing unit is taken. Value added of a firm by subtracting intermediate consumption from value of output. Firms Value of Minus I.C. Value Output.
| Firms | Value of output | Minus | I.C | Value Addede |
| A | 1000 | _____ | 0 | 1000 |
| B | 2000 | _____ | 1000 | 1000 |
| C | 2700 | _____ | 2000 | 700 |
| D | 3500 | _____ | 2700 | 800 |
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| Output(units) | Total Variable Cost | Average Variable Cost | Marginal Cost |
| 1 | 10 | - | - |
| - | - | 8 | 6 |
| 3 | 27 | - | - |
| - | - | 10 | 13 |