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

Double counting inflates economic output/income calculations. It happens when the value of intermediate goods is added to the value of final goods during national income estimation.
Why it's a problem: 
Intermediate goods are used to produce final goods (e.g., raw materials). 
Final goods are ready for consumption/investment and already include the value of all intermediate goods. 
Including both leads to counting intermediate goods' value multiple times, thus increasing national income figures incorrectly. 
Example: 
A farmer sells wheat for ₹ 100 to a baker. 
The baker makes bread and sells it for ₹ 150. 
If we count both wheat and bread, the total is ₹ 250, which is wrong. 
The correct output is ₹ 150 (the bread's value), as it includes the wheat's cost. 
Conclusion: To avoid this, only final goods and services' value should be used in national income accounting.