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Question
Answer in detail:
Explain the 'Final Good Approach' to avoid double counting of goods and services in the estimation of national income.
Solution
The final goods approach: Final goods refer to those goods and services that are meant for final consumption by the consumers. For example, a packet of cotton balls at a retail shop is a final good. Such cotton is ready to be used by the consumers for various purposes without any requirement of further value addition. Similarly, a car at a showroom is a final good, ready to be driven out on the roads. Intermediate goods refer to those goods that are not readily consumed for final consumption by the consumers. These goods are used only as inputs/ raw materials in the production process. According to this method, national income is estimated by taking the market value of the final goods and services produced in an economy during an accounting year and ignoring the value of intermediate goods.
This can be understood by the following example:
| Production stages | Value of input | Value of output | Value added |
| Milk(farmer) | 0 | 400 | 400 |
| Cheese(dairy) | 400 | 800 | 400 |
| Sweets(shopkeeper) | 800 | 1200 | 400 |
| Total value | 1200 | 2400 | 1200 |
Here, we have assumed that there is only one final product (sweets) and there are three stages of production i.e. there is milk, cheese and sweets. Milk is the only input in the production of cheese and cheese is the only input in the production of sweets.
Now, the final value of sweets produced is Rs 1200. So, the national income is Rs 1200.
If we would have summed the value of output at each stage, the total value of output at each stage would have been Rs 2400. The value of cheese (800) includes the value of milk (400), as well which has already been included at the farmer’s level. Similarly, the value of sweets (1200) includes the value of cheese (800), which too has been taken care of at the dairy level. Thus, estimating the value of output at each level counts the value of a commodity twice or double times. So, the value of national income is Rs 1200.
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