Page 24 - DECO402_Macro Economics

Unit-2: National Income : Concept of National Income

` 600. For flour mill, flour is a final production, but backeryman will assume it a intermediate goods Notes
and will use it for bread. Backeryman sells it to bread shopkeeper at ` 800. For backeryman double
bread is a final goods but for shopkeeper it is a intermediate goods. Shopkeeper sells double bread
to final consumer at, ` 900. As far as question of farmer, flour mill, backeryman and shopkeeper are,
any person for estimation of final product will add ` 400, ` 600.` 800 and ` 900. Which will be ` 2700.
But in economy by this methods GDP or total production is not estimated. In the above estimation
of production, a producer /firms value of production is reflected in other producer’s product value,
because product of one’s is used as inputs for others. Hence in value of flour value of wheat is included
and in value of bread of flour. In total value of production ` 2700, uses of ` 1800 value goods in form
of intermediate goods or middle consumption. The value of final production’s value, we do mistake
of double counting, to eacape from it is necessary.

Problem of Double Counting

In the estimation of national product, when the value of any goods is calculated more than once, then
it is called mistaking of double counting. Clearly, due to this reason in country’s Gross Domestic
Product (GDP) is increased unnecessarily. In above example in the estimation GDP, value of wheat
is added four times. First time, when is produced by farmer, second time when is converted to flour,
third time when it is converted to bread and fourth time when it solds to final consumer. Only that
time when bread is sold to final consumer, then in the form of bread it make a final goods. Before this
it revolves from on producer to another producer as intermediate goods whose role in production
process as and intermediate consumption. Double counting is exist when those goods which are using
now as intermediate goods, included in the estimation of GDP.

Two ways of solving the problem of Double counting

By following tow methods, double counting problem can be solved. Firstly in the estimation of GDP we
added only the value of final goods not of intermediate goods. We have given already the description
of difference of final goods and intermediate goods in chapter repeat it again that:
(i) The use of intermediate goods as raw material in production of other goods or by firm and
producer, it can be sold again. Just its contrary the use of final goods does not as raw material
in the production of other goods of by producer and firms its do not selling again.
(ii) Intermediate goods is under the line of production. In these goods now the adding of value
is remain. Just its contrary final goods are the outside of production line and in its no value
is added.
We can safe from problem of double counting only keeping in mind. The value of final goods estimating
the GDP, any goods value is not calculated two fold.

What is Value Addition?

Using in production process intermediate goods, cost, production’s value is as much from that, that
is called value addition.
In Beckerman words “The term value added implies, it is value added by each industry to the raw
material or other goods and services that it bought from other industries before passing on the product
to the nest link in whole chain of production.” There, in previous given example farmer did ` 400
value added (assumption on that, that intermediate consumption is zero) flour mill ` 600 – ` 400 = `
200 value added, and beckeryman making bread value added, ` 800 – ` 600 = ` 200. shopkeeper sellin
bread ` 900 – ` 800 = ` 100 value added. Total value addition ` 400 + ` 200 + ` 200 + ` 100 = ` 900.

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