Question

Answer in detail:

Explain the 'Final Good Approach' to avoid double counting of goods and services in the estimation of national income.

Answer 1

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.