Double counting is an error caused as a result of illogical calculation. This term is used in economics to refer to the faulty practice of counting the value of a nation's goods more than once. Since goods are produced in stages, through specialized channels of production, many intermediate goods are used to produce a final good. If the values of each of these intermediate goods is added together, without subtracting expenditures incurred during the production process, the error of double counting will be committed.
When Henry Ford used assembly lines to advance the production of cars in his factory almost 100 years ago, he employed a method of production called "specialization." It assigns specific aspects of production to specific employees, and ultimately reduces the time and cost to produce a car. Specialization may be employed to a similar advantage within the economy of an entire nation. While one type of industry may produce a primary product, such as steel, another industry may make use of this primary product to produce a secondary product. Thus, specialization allows both industries to benefit, and usually serves to save both time and production costs.
Intermediate goods, or goods that must be used during a product's assembly, may be considered the cost of doing business. While some commodities produced by a business are intangible, such as an insurance plan or counseling service, most commodities are tangible and involve the use of intermediate goods during their production. For example, for a fast food restaurant such as McDonald's to be able to sell drinks, it must purchase straws and cups from one company and concentrated cola from another company. Each of the items used to produce the drink is an example of an intermediate good.
Final goods are not simply commodities that make use of intermediate goods. For example, while a new car headlight may be a final good if it is purchased by a driver to repair his own car, it may also qualify as an intermediate good if it is purchased by an auto mechanic to help make a used car ready for resale. Thus, final goods are actually goods that are put to use, and that are not directly used to produce another good.
When economists attempt to assess a nation's financial health during a specific period, they may be tempted to calculate the market value of all goods (both intermediate and final) produced by the nation during a certain period. The resulting figure, while helpful, is bereft of common sense. However, by analyzing a nation's economic activity more carefully, one will consider three factors that affect production: expenditure, output and income. The cost of creating products is taken into account to produce a meaningful measurement of the market value of all final goods sold in a nation during a certain time frame. This modified form of measurement produces a nation's GDP, or gross domestic product.
By figuring in "value added," economists can reasonably assess the final value of goods produced by a nation. Value added figures the value of a nation's final products, subtracting costs that were incurred to produce these products. Ultimately, value added can serve to correct the mistake of double counting.