Double counting is a critical issue that arises in the calculation of national income when certain economic activities or transactions are counted multiple times, leading to an inflated estimation of the country's total income. This distortion can result in an inaccurate representation of the actual economic output and may mislead policymakers and analysts.
The practical way to avoid double counting when calculating national income is: Value-added approach: By focusing on the value added at each stage of production, we avoid counting the value of intermediate goods multiple times. For example, consider the production of a smartphone. Instead of counting the value of raw materials, components and final assembly, focus on the value added by each stage of the production process, which is the actual contribution to the national income.