Double counting (accounting)
Encyclopedia
Double counting in accounting is an error whereby a transaction is counted more than once, for whatever reason. But in social accounting it also refers to a conceptual problem in social accounting practice, when the attempt is made to estimate the new value added by Gross Output
, or the value of total investments.
But things are more complicated when we aggregate the accounts of many enterprises, households and government agencies ("institutional units" or transactors in social accounting language). Here, a conceptual problem arises.
The basic reason is that the income of one institutional unit is the expenditure of another, and the input of one institutional unit is the output of another.
If therefore we want to measure the total value-added by all institutional units, we need to devise a consistent system for grossing and netting the incomes and outlays of all units. Lacking such a system, we would end up double counting incomes and expenditures of interacting units, exaggerating the quantity of value-added or investments.
, which specifies what may generally count as:
In other words, we cannot relate, group and aggregate prices in different ways without making some value-based assumptions that enable valid comparisons. Without those value assumptions, the aggregates themselves would be meaningless. Thus, when economists focus on market-prices, value assumptions are always in the back of their mind, even if they are not aware of that, and regard value theory as metaphysical
.
Neo-classical economics rejects any value theory other than subjective marginal utility
preferences, but social accountants who provide the empirical data for their economic science cannot regard value as simply subjective. Otherwise, anything can count as anything, according to subjective preference, and any old computation is permissible.
of incomes and expenditures. All flows can then be allocated to their appropriate category, without counting the same flow several times.
In fact, the value theory applied in national accounts
is nowadays strongly influenced by the valuation principles of ordinary business accounts and the prevailing social relations governing economic exchange, often fixed by law. Thus, for example, it is argued that no new value can result from a unilateral transfer of funds, i.e. where funds are provided without anything being provided in return.
The implicit assumption made in national accounts, is that the account at the macro-level must be similar to that at the micro-level. Economic relations are regarded as broadly the same at the micro-level and the macro-level. An individual business buys and uses up inputs and produces outputs for sale; it has costs and revenues. Thus, in social accounting all transactors are treated in a similar way ("as if" they were a business). The accounts can be criticised for being eclectic in some ways, but that is not necessarily a problem; the aim of the exercise is to identify and categorise all flows, and the user can then reaggregate them in different ways.
The first and most obvious reason is that, in actual accounting practice, boundary problems arise, because a flow of expenditures might be interpreted in different ways, from an accounting point of view. Sometimes, it will not be altogether clear which category a flow of expenditure belongs to exactly, it may not "fit" exactly into a category, or, it is technically impossible to separate out different flows in financial data, in such a way that is required by the social accounting system. This may mean that a flow is, in part or as a whole, inadvertently counted twice, because of difficulties with the data sources.
We might, for example, be easily able to identify an expenditure, yet this expenditure may not tally with the corresponding income that should exist, insofar as we can identify it (or vice versa). In that case, we have to make some assumptions or imputations based on what we do know, or can observe. Yet, some statistical discrepancies may remain.
Another reason has to do with the complexities of trade, in particular trade in services and international trade. Not only can it be difficult to correctly identify, survey and allocate particular financial incomes and expenditures, but also revaluations of assets occur, creating problems of how to value goods and services as such.
At the highest level, due to the expansion of foreign trade, a fraction of local value-added may consist of the local inflation of foreign-produced value-added, simply because imported foreign products are resold locally, at inflated prices, without any corresponding additional local production occurring. This may not necessarily create problems of double counting locally, but if we want to estimate world GDP, we may face double counting problems of some kind.
(GDP) and world Gross National Product (GNP, now known as Gross National Income or GNI) are conceptually identical values for social accountants (because, by definition, the total net positive international factor income receipts included in GNP exactly cancel out the corresponding total net negative receipts), the World Bank
valuation of GNP and GDP differs by about one trillion US dollars, and the difference grows year by year.
The reason here however is not a double-counting error, but that different valuations of national currencies are used. Thus, the World Bank applies "ppp" (purchasing power parity
) valuations to GDP, but an "Atlas Method
" to estimate GNI. The argument is apparently that if world GDP is treated as an income, it will shrink (the World Bank cites 2004 world GNI of $39.8 trillion and a world GDP of $40.9 trillion, a discrepancy of $1.1 trillion).
One result of these different valuation methods, critics point out, is that it becomes impossible to compare GDP and GNI internationally with respect to the net international transfer of factor-income
(mainly profit income), which is excluded from national GDP, but included in national GNI.
Gross Output
Gross output is an economic concept used in national accounts such as the United Nations System of National Accounts and the US National Income and Product Accounts...
, or the value of total investments.
What is the problem?
In the case of a small individual business, it is unlikely that an expenditure of funds, an input or output, or an income from production will be counted twice. If it happens, that's usually just bad accounting (a math error), or else a case of fraud.But things are more complicated when we aggregate the accounts of many enterprises, households and government agencies ("institutional units" or transactors in social accounting language). Here, a conceptual problem arises.
The basic reason is that the income of one institutional unit is the expenditure of another, and the input of one institutional unit is the output of another.
If therefore we want to measure the total value-added by all institutional units, we need to devise a consistent system for grossing and netting the incomes and outlays of all units. Lacking such a system, we would end up double counting incomes and expenditures of interacting units, exaggerating the quantity of value-added or investments.
Value theory
The system of gross and netting actually used, is ultimately based on a value theoryValue theory
Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...
, which specifies what may generally count as:
- comparable value (value equivalence)
- value decrease
- value increase
- conserved value
- transferred value
- newly created value
In other words, we cannot relate, group and aggregate prices in different ways without making some value-based assumptions that enable valid comparisons. Without those value assumptions, the aggregates themselves would be meaningless. Thus, when economists focus on market-prices, value assumptions are always in the back of their mind, even if they are not aware of that, and regard value theory as metaphysical
Metaphysics
Metaphysics is a branch of philosophy concerned with explaining the fundamental nature of being and the world, although the term is not easily defined. Traditionally, metaphysics attempts to answer two basic questions in the broadest possible terms:...
.
Neo-classical economics rejects any value theory other than subjective marginal utility
Marginal utility
In economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...
preferences, but social accountants who provide the empirical data for their economic science cannot regard value as simply subjective. Otherwise, anything can count as anything, according to subjective preference, and any old computation is permissible.
Counting units
Once the principles of the value theory are established, categories and counting units can be exactly and logically defined, as a basis for mathematical operations to aggregate the flowsStock and flow
Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time , which may have...
of incomes and expenditures. All flows can then be allocated to their appropriate category, without counting the same flow several times.
In fact, the value theory applied in national accounts
National accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
is nowadays strongly influenced by the valuation principles of ordinary business accounts and the prevailing social relations governing economic exchange, often fixed by law. Thus, for example, it is argued that no new value can result from a unilateral transfer of funds, i.e. where funds are provided without anything being provided in return.
The implicit assumption made in national accounts, is that the account at the macro-level must be similar to that at the micro-level. Economic relations are regarded as broadly the same at the micro-level and the macro-level. An individual business buys and uses up inputs and produces outputs for sale; it has costs and revenues. Thus, in social accounting all transactors are treated in a similar way ("as if" they were a business). The accounts can be criticised for being eclectic in some ways, but that is not necessarily a problem; the aim of the exercise is to identify and categorise all flows, and the user can then reaggregate them in different ways.
Persistent double counting problems
However, even if a consistent system of accounting rules is devised that conceptually eliminates double counting, double counting may technically still occur to some extent.The first and most obvious reason is that, in actual accounting practice, boundary problems arise, because a flow of expenditures might be interpreted in different ways, from an accounting point of view. Sometimes, it will not be altogether clear which category a flow of expenditure belongs to exactly, it may not "fit" exactly into a category, or, it is technically impossible to separate out different flows in financial data, in such a way that is required by the social accounting system. This may mean that a flow is, in part or as a whole, inadvertently counted twice, because of difficulties with the data sources.
We might, for example, be easily able to identify an expenditure, yet this expenditure may not tally with the corresponding income that should exist, insofar as we can identify it (or vice versa). In that case, we have to make some assumptions or imputations based on what we do know, or can observe. Yet, some statistical discrepancies may remain.
Another reason has to do with the complexities of trade, in particular trade in services and international trade. Not only can it be difficult to correctly identify, survey and allocate particular financial incomes and expenditures, but also revaluations of assets occur, creating problems of how to value goods and services as such.
At the highest level, due to the expansion of foreign trade, a fraction of local value-added may consist of the local inflation of foreign-produced value-added, simply because imported foreign products are resold locally, at inflated prices, without any corresponding additional local production occurring. This may not necessarily create problems of double counting locally, but if we want to estimate world GDP, we may face double counting problems of some kind.
Does the World Bank double count?
Interestingly, while world Gross Domestic ProductGross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) and world Gross National Product (GNP, now known as Gross National Income or GNI) are conceptually identical values for social accountants (because, by definition, the total net positive international factor income receipts included in GNP exactly cancel out the corresponding total net negative receipts), the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
valuation of GNP and GDP differs by about one trillion US dollars, and the difference grows year by year.
The reason here however is not a double-counting error, but that different valuations of national currencies are used. Thus, the World Bank applies "ppp" (purchasing power parity
Purchasing power parity
In economics, purchasing power parity is a condition between countries where an amount of money has the same purchasing power in different countries. The prices of the goods between the countries would only reflect the exchange rates...
) valuations to GDP, but an "Atlas Method
Atlas Method
The Atlas Method is a method used by the World Bank to estimate the size of economies in terms of gross national income in U.S. dollars.The country's GNI in national currency is converted into U.S...
" to estimate GNI. The argument is apparently that if world GDP is treated as an income, it will shrink (the World Bank cites 2004 world GNI of $39.8 trillion and a world GDP of $40.9 trillion, a discrepancy of $1.1 trillion).
One result of these different valuation methods, critics point out, is that it becomes impossible to compare GDP and GNI internationally with respect to the net international transfer of factor-income
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
(mainly profit income), which is excluded from national GDP, but included in national GNI.
See also
- National accountsNational accountsNational accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
- United Nations System of National Accounts (UNSNA)
- value addedValue addedIn economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
- GDP
- Real prices and ideal pricesReal prices and ideal pricesReal prices and ideal prices refers to a distinction between actual prices paid for products, services, assets and labour , and computed prices which are not actually charged or paid in market trade, although they may facilitate trade...
- Intermediate consumptionIntermediate consumptionIntermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...