Why do we need to eliminate …

The problem of double counting is the problem of estimating the value of goods and services more than once. Value of intermediate goods is not included in the estimation of gross domestic product because value of intermediate goods is reflected in the value of final goods. For e.g. a farmer sold wheat to flour mill for Rs 10 per kg. The mill grinds the wheat and sold the flour to a biscuit company for Rs 12 per kg. The biscuit company uses the flour, sugar and butter to make 5 biscuit packets. These biscuits are sold to consumer at Rs 15 per biscuit packet (Rs 75). Here biscuits are the final goods which are purchased by the consumer. Wheat and wheat flour are the intermediate goods used in the production of final good. The value of biscuit, Rs 15 includes the value of flour, Rs 12. Hence, only the value of final goods and services are taken into consideration.