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Difficulty: MediumDifficulties and Problems in National Income Accounting

A bakery purchases flour for 50,00050,000, sugar for 20,00020,000, and utility services for 10,00010,000 to produce bread, which is sold to final consumers for 120,000120,000. If a statistician computes the national income contribution by summing the revenues of all four transactions, by how much is the national output overstated due to double counting?

  1. A
    ₦40,000
  2. ₦80,000Answer
  3. C
    ₦120,000
  4. D
    ₦200,000

Answer

The national output is overstated by ₦80,000 because the value of intermediate inputs (flour, sugar, and utilities) was added alongside the final product value.
To calculate national output correctly, either the value of final goods alone (₦120,000) or the sum of value added at each stage must be used. Adding the intermediate inputs (₦50,000 + ₦20,000 + ₦10,000 = ₦80,000) on top of the final output price of ₦120,000 yields ₦200,000. Thus, national output is overstated by the exact sum of the intermediate inputs, which is ₦80,000.

Step-by-Step Solution

1
Determine the true national output value using final expenditure
True national output = ₦120,000 (the market value of final bread sold to consumers)
National income accounting counts only final goods and services to avoid double counting.
2
Calculate the flawed aggregate figure recorded by the statistician
Recorded total = ₦50,000 + ₦20,000 + ₦10,000 + ₦120,000 = ₦200,000
The statistician summed both intermediate inputs and the final output.
3
Compute the overstatement due to double counting
Overstatement = Recorded total - True national output = ₦200,000 - ₦120,000 = ₦80,000
The overstatement equals the total value of intermediate inputs erroneously included.

Key Concept

Double Counting in National Income Accounting
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Topics

Difficulties and Problems in National Income Accounting

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