Question

Why must you avoid double counting when

measuring GDP?

Short answer

Double counting should be avoided as the reported GDP can be more than the actual amount of production.

Step-by-step solution

Step 1. Introduction

When the cost of inputs utilized in the production of final goods and services is included in the calculation of GDP, the problem of double counting occurs. This is because the value of inputs utilized in the manufacturing of a product is included in the ultimate price of goods and services.

Step 2. Conclusion

If the price of inputs is taken into account while calculating GDP, the reported GDP will be higher than the actual quantity of production.

Step 3. Example

For example, the gross domestic product (GDP) is calculated based on the sale of a shirt in a store. However, it does not account for the cost of thread and cotton. This is due to the fact that all of those inputs are counted at the point of sale.