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Difficulty: EasyDifficulties and Problems in National Income Accounting

When computing national income using the output method, an economist includes both the full value of raw timber sold to a furniture maker and the final market value of the furniture produced from that timber. Which difficulty in national income accounting is created by this procedure?

  1. Double counting of national outputAnswer
  2. B
    Underestimation of total national output
  3. C
    Distortion caused by price inflation
  4. D
    Errors in converting GDP to GNP

Answer

Double counting of national output
The correct answer is double counting of national output. In national income accounting using the output method, only the value added at each stage or the value of final goods should be counted. Including the intermediate good (raw timber) along with the final good (furniture) results in counting the input's value twice, which artificially inflates national income.

Step-by-Step Solution

1
Identify the nature of raw timber in the production process.
Raw timber is an intermediate good used to manufacture furniture.
Intermediate goods are inputs already embodied in the value of the final good.
2
Analyze the impact of adding intermediate goods to final goods.
The value of raw timber is counted once as an input and a second time as part of the furniture's final price.
This leads directly to the problem of double counting in national income statistics.

Key Concept

Double Counting in Output Method
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Topics

Difficulties and Problems in National Income Accounting

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