Final answer:
The problem of double counting in national income involves including the value of intermediate goods when calculating GDP, such as counting both tires and the vehicle they are part of, leading to overestimation of economic activity.
Step-by-step explanation:
The value of a nation's output is synonymous with the total value of a nation's income, commonly referred to as Gross Domestic Product (GDP) or national income. GDP represents the total monetary value of all final goods and services produced within a country during a specific period, often one year. However, when calculating GDP, statisticians must avoid the problem of double counting, which occurs when the value of a product is counted more than once as it passes through various stages of production. An example of double counting would be if government statisticians counted the value of tires made by a tire manufacturer and then also counted the value of a new truck sold by an automaker, which includes those same tires. This results in an inflation of GDP figures because the value of the tires is included in the truck's price.
To accurately measure the nation's economic activity, we should only include the final value of goods and services, thereby excluding intermediate goods like the tires when they are used to manufacture another product like a truck. Only counting final products prevents the distortion of national income calculations and ensures that GDP accurately reflects economic activity.