question_answer

                                      Explain the problem of double counting in the estimation of National Income with the help of an illustration. How can it be avoided?                                                 

How will you treat the following while estimating domestic product of India?

(i) Rent received by a resident Indian from his property in Singapore.

(ii) Salaries to Indians working in Japanese Embassy in India.

(iii)Profits earned by a branch of an American Bank in India.

(iv) Salaries paid to Koreans working in Indian Embassy in Korea.

Answer:

The of the value of commodity more than once is called double counting. This leads to over estimation of the value of goods and services produced. Thus, the importance of avoiding double counting lies in correct estimation of the value of domestic product, e.g. a farmer produces one tonne of wheat and sells it for Rs.400 in the market to a flour mill. The flour mill sell it for Rs.600 to the baker. The baker sells the bread to the shopkeeper for Rs.800. The shopkeeper sells the entire bread to the final consumers for Rs.900. Thus,  Value of Output=   Rs. (400 + 600 + 800 + 900) = Rs .2,700 In fact, the value of the wheat is counted four times, the value of services of the miller thrice and the value of services by the baker twice. In other words, the value of wheat and value of services of the miller and of the baker have been counted more than once. The counting of the value of commodity more than once is called double counting.     To avoid the problem of double counting, following two methods are used: (i) Final Output Method According to this method, the value of intermediate goods is not considered. Only the value of final goods and services is considered. In the above example, the value of final goods, i.e. breads is Rs.900 (ii) Value Added Method Another method to avoid the problem of double counting is to estimate the total value added at each stage of production. In the above example, the value added at each stage of production is Rs. (400+200+200+100)=Rs.900.                                       (i) It will not be included in domestic product of India as this income is earned outside the domestic (economic) territory of India.                                                                (ii) It will not be a part of domestic product of India as embassy of Japan in India is not a part of domestic territory of India. Hence, this income is not earned within the domestic territory of India.            (iii) It will be included in domestic product of India as the branch of American bank is located within the domestic territory of India. So, it is income earned within the domestic territory of India.            (iv) It will be part of domestic product of India because this income is earned within the domestic territory of India. Indian Embassy in Korea is treated as located within the domestic territory of India.