Saturday, April 27, 2013

US GDP Calculation Changes.

In JULY 2013, the Bureau of Economic Analysis (BEA) will release the initial results of the 14th comprehen­sive, or benchmark, revision of the national income and product accounts (NIPAs). The last comprehensive revision was released in July 2009.
- Recognize expenditures by business, government, and nonprofit institutions serving households (NPISH) on research and development as fixed investment 
- Recognize expenditures by business and NPISH on entertainment, literary, and other artistic originals as fixed investment
- Expand the ownership transfer costs of residential fixed assets that are recognized as fixed investment and improve the accuracy of the associated asset values and services lives
- Measure transactions of defined benefit pension plans on an accrual accounting basis by recognizing the costs of unfunded liabilities and showing the pension plans as a subsector of the financial corporate sector
- Harmonize the treatment of wages and salaries by using accrual-based estimates consistently throughout the accounts 

So what is the BEA doing, and why should anyone care?
First, some basics: GDP aims to capture the value of goods and services produced within U.S. borders in a given periods. The Bureau of Economic Analysis generally does this by measuring the value of goods purchased by consumers. The logic goes like this: When you buy a washing machine, the price you pay captures the value of the work of everybody in that chain of labor and materials that went into creating that washing machine: The sales clerk who sold it to you, the trucker who delivered it to the store, the factory worker who assembled it, the marketing person who designed the logo, the steel and copper that are the raw materials for the machine, and the chief executive of the company that made it. Instead of trying to measure each of those inputs from the ground up, they are all encapsulated in the “personal consumption expenditure” that takes place when you buy the washing machine.

But when the washing machine company invests in long-lasting assets—a factory, for example, or a package of accounting software—it contributes to GDP through a second column, for fixed investment. Investment—spending money on things expected to have a payoff over a long period of time—are treated differently than the routine expenses involved in making something.
Which brings us to George Lucas. When he made a Star Wars movie, his company spent a lot of money to create the film. It then owned a copyright, and could make money for many years afterward on that investment. In other words, it’s a lot more like our washing machine company building a factory than it is like the routine process of making washing machines. The same is true for a lot of types of intellectual property: When Apple researchers develop the iPad, or Suzanne Collins writes a Hunger Games novel, it is an upfront investment that will have a long payoff.
So now BEA will treat research and development and creation of artistic works as longer-term investments, not unlike factories,  equipment, or software. On a purely technical level, this should more precisely match GDP in any one quarter to the actual economic value the nation generates in that span. In the old system, the value of the economic output of a Star Wars movie would only show up in GDP over decades to come, in the form of personal consumption expenditures like movie tickets and DVD sales.
Indeed, BEA will revise data going back to 1929 using the new approach, essentially creating a new historical record of the U.S. economy (while it will change the level of GDP, it shouldn’t result in any meaningful change in the ebb and flow of business cycles, however).


No comments: