In national income accounting, how can accountants avoid the problem of multiple counting when calculating gross domestic product (GDP)?

Introduction / Context:
When measuring the size of an economy using gross domestic product, national income accountants must be very careful to avoid multiple counting. Multiple counting means counting the same production more than once, which would artificially inflate GDP and give a misleading picture of economic performance. This question checks whether you understand the standard method used in national income accounting to avoid this problem and obtain accurate GDP figures.

Given Data / Assumptions:
- We are working within the framework of GDP measurement for a country.
- Many goods pass through several production stages, moving from raw materials to intermediate goods to final goods.
- The question asks for the method used by accountants to avoid counting the same value several times at different stages.
- We assume standard textbook definitions of GDP based on final output and value added.

Concept / Approach:
If we simply added the value of every transaction in the economy, we would count the value of raw materials, intermediate goods, and final goods multiple times. To solve this, national income accountants either sum the value added at each stage of production or, more simply for teaching, only count the value of final goods and services sold to final users. Final users include households, firms purchasing for investment, government, and foreign buyers. By counting only final goods, we ensure that the value of intermediate goods is embedded in the value of final output rather than counted separately.

Step by Step Solution:
Step 1: Recall that multiple counting occurs if we include both intermediate and final goods in GDP calculations. Step 2: Note that the standard solution is to include only final goods and services or, equivalently, to use the value added method. Step 3: Examine option A, which talks about subtracting net domestic product from gross domestic product; this is a different adjustment related to depreciation, not multiple counting. Step 4: Examine option B, which is about exports and imports; this is important for converting domestic production to national expenditure but does not directly address multiple counting of production stages. Step 5: Examine option C, which clearly states that only final goods and services are counted, which is exactly the standard solution to avoid multiple counting. Step 6: Option D suggests no adjustment, which would lead to serious overestimation of GDP and is therefore incorrect.

Verification / Alternative check:
Consider a simple example: a farmer sells wheat to a miller for 10 units of currency; the miller sells flour to a baker for 20; the baker sells bread to consumers for 30. If we add 10 plus 20 plus 30 we get 60, which double counts the wheat and flour. The true final value created for consumers is 30, which already includes the embedded value of wheat and flour. National income accountants therefore record only the value of the final bread in GDP, or equivalently record value added at each stage as 10, then 10, then 10, which also totals 30. This simple example confirms that counting only final goods is the correct way to avoid multiple counting.

Why Other Options Are Wrong:
Option A is wrong because subtracting net domestic product from gross domestic product deals with depreciation, not with repeated counting of intermediate goods.
Option B is wrong because adjusting for exports and imports prevents double counting between domestic and foreign production, but it does not solve the specific problem of counting intermediate and final goods in the domestic economy.
Option D is wrong because summing every transaction without adjustment is exactly what national income accounting seeks to avoid; it would severely overstate GDP.

Common Pitfalls:
A frequent mistake is to treat all market transactions as if they contribute equally to GDP. Students sometimes forget that the sale of an intermediate good to another firm is not counted separately in GDP when the final product is later sold to consumers. Another pitfall is mixing up the concept of final goods with new versus used goods; used goods are not included in current GDP at all. Keeping clear that GDP measures current final production helps avoid these confusions and leads to correct answers in questions like this one.

Final Answer:
By including only the value of final goods and services and excluding intermediate goods.