Chapter 6, Problem 1.1P

To determine

To define double counting and its impact on GDP.

Explanation of Solution

Double counting is the phenomenon which occurs when the price of an intermediate commodity is counted twice. An intermediate is defined as a commodity which is used for further production of some other good. GDP is calculated as the total value of all final goods and services produced within the territory of a country in a given financial year.

The total sales include the sale of intermediate goods also. GDP is different from the total sales because the total sales include intermediate goods while the GDP takes into account only final goods.

Economics Concept Introduction

Concept Introduction:

Double counting: Double counting is an accounting error in which the value of intermediate goods are accounted more than one time.

GDP (Gross Domestic Product): GDP refers to the market value of all final goods and services that are produced in an economy during an accounting year. It is equated as $\text{GDP}=\text{Consumption (C)}+\text{Investment (I)}+\text{Government expenditure}\text{}\text{ (G)}+\text{Net export}$.