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INSURANCE: Transferring risk to others. The need for insurance occurs because people tend to be risk averse in many circumstances. As such, most of us are willing to pay for certainty. Those who satisfy this need for insurance, insurance companies for example, do so because they can pool risk. If insurance companies know the chance of some loss (an accident, illness, or whatever) and its cost, then they can divide this cost among a large group of risk averse types. The insurance company agrees to pay the cost of the loss and each of the risk averse types pay a risk premium, but get the peace of mind that goes with certainty.
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                           DOUBLE COUNTING: The act of including the value of intermediate goods more than once in the value of gross domestic product. Because the value, or price, of final goods includes the cost, or value, of all intermediate goods used in production, including market transactions for intermediate goods separately in the measurement of gross domestic product leads to double counting. Double counting results if the value of an intermediate good is included in the gross domestic product more than once. Such double counting would seriously overstate gross domestic product. It can occur if the market transaction for the final good produced with an intermediate good is included in gross domestic product AND the market transaction for the intermediate good is also included separately in gross domestic product. Because the value of a final good already includes the value of an intermediate good, including it separately means including it twice and double counting.All Transactions are Not EqualThe number crunchers at the Department of Commerce responsible for tabulating gross domestic product make a special effort NOT to double count the value of production. While this might seem like an easy task, such is not always the case. The reason is that the Commerce GDP tabulators measure gross domestic product by collecting information about market transactions throughout the economy. While this provides an excellent starting point for calculating the value of current production, they must identify and exclude those market exchanges that involve intermediate goods. They need not include these market transactions because the value of intermediate goods will ultimately show up in the value of final goods.To see why this might be difficult, suppose that Jonathan McJohnson purchases a new set of All Season MegaTread tires for his vintage 1983 OmniMotors XL GT 9000 Sports Coupe. As a card-carrying member of the household sector, Jonathan buys these tires for his personal driving enjoyment. The market value of this purchase is a consumption expenditure and is included in gross domestic product. In contrast, suppose that OmniMotors also buys a set of All Season MegaTread tires for the production of a brand new OmniMotors XL GT 9000 Sports Coupe. OmniMotors buys these tires as an intermediate good in the production of its OmniMotors XL GT 9000 Sports Coupe. This Sports Coupe, complete with All Season MegaTread tires is ultimately be sold to a satisfaction-minded consumer like Maurice Finkelstein. When purchased by Maurice, the total value of the OmniMotors XL GT 9000 Sports Coupe, including tires, is a consumption expenditure and is included in gross domestic product. A potential problem emerges if the total sales of every All Season MegaTread tire sold by the MegaTread Tire is included in gross domestic product. Doing so means double counting. Some of the tires sold are finals goods purchased by the household sector and some are intermediate goods purchased by other firms like OmniMotors. Including transactions for All Season MegaTread tires when purchased as an intermediate good by OmniMotors in gross domestic product causes serious double counting. The value of the tires is part of the value of the Sports Coupe and need not be included separately in gross domestic product. Double Stuffing an AmigoTo further examine this notion of double counting, consider the production of a relatively simple product like Wacky Willy Stuffed Amigos. Stuffed Amigos have three primary material inputs or intermediate goods: fabric, thread, and stuffing. The fabric is 100 percent cotton, produced by OmniTextiles. The thread is a cotton-polyester blend, produced by MegaThread. And the stuffing is a gelatinous substance produced using soybean extract, graphite, and recycled newspapers by a firm called Ooze, Inc.In addition to these intermediate goods, The Wacky Willy Company also uses the four basic factors of production--labor, capital, land, and entrepreneurship. The expense of these resources in the production of Stuffed Amigos is not particularly important at the present. What is important is the market transactions for the intermediate goods. | Stuffed Amigo Production |
| | Production Input | Value |
| | Fabric | $1.00 | | Thread | $0.25 | | Stuffing | $2.75 |
| | Intermediate Goods | $4.00 |
| | Labor | $5.00 | | Capital | $3.00 | | Land | $0.50 | Profit | $2.45 |
| | Value Added | $10.95 |
| | Total Value | $14.95 |
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The table at the right presents a breakdown of the revenue received by The Wacky Willy Company for the sale of one Stuffed Amigo and the cost incurred in its production. The sales price is $14.95. This is the revenue collected by The Wacky Willy Company. More importantly, this is the value placed on this product by the buyer and the market transaction for this Stuffed Amigo is included in gross domestic product.But, the production of this Stuffed Amigo involves other market transactions. One market transaction is the purchase of fabric by The Wacky Willy Company from OmniTextiles for $1. Another market transaction results when The Wacky Willy Company buys $0.25 worth of thread from MegaThread. And a third market exchange is $2.75 worth of gelatinous substance sold by Ooze, Inc. to The Wacky Willy Company. Each of these three companies, OmniTextiles, Mega Thread, and Ooze, Inc., not only sells intermediated goods to firms like The Wacky Willy Company, but they also sell final goods directly to consumers. If the Department of Commerce number crunchers merely added all market transactions, they would be overstating the value associated with the production of this Stuffed Amigo. In addition to the actual $14.95 value of the Stuffed Amigo, they would be separately including $4 worth of intermediate good transactions. Should the Department of Commerce do this for all production, they would seriously over estimate the actual value of production during the year. In fact, because most production involves numerous intermediate good transactions, transactions that often have a total value several times the final product, gross domestic production would be seriously overstated if the intermediate goods were included separately.
Recommended Citation:DOUBLE COUNTING, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: May 12, 2024].
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