The Problem of Double-Counting

So what is this problem of double-counting? Consider the example in Table 1. In this example, the farmer supplies raw material to the miller, and the miller supplies raw material to the baker.

Table 1. Double-Counting

Now suppose we just count up the value of the sales. We have $100,000 sold by the farmer plus $150,000 sold by the miller plus $250,000 sold by the baker for a grand total of $500,000. But this is an exaggeration. We have counted the flour twice -- once when the miller sold it to the baker, and again when the baker sold the bread made from the flour. Worse, we have counted the wheat three times -- once when the farmer sold it to the miller, again when the miller sold the baker flour made from it, and yet again when the baker sold the bread made from the flour. This is the problem of double-counting. We need to find ways to measure national output without this sort of exaggeration.
One way to do this is to focus on value added.