Why GDP Will Rise (Not What You Think)

In Bloomberg BusinessWeek, Peter Coy writes an excellent piece on the Bureau of Economic Analysis’s upcoming revision of  Gross Domestic Product measurement. That may not sound very interesting but Coy does a great job showing the macro and micro angles. To wit:

On July 31, the U.S. Bureau of Economic Analysis will rewrite history on a grand scale by restating the size and composition of the gross domestic product, all the way back to the first year it was recorded, 1929. The biggest change will be the reclassification—nay, the elevation—of research and development. R&D will no longer be treated as a mere expense, like the electricity bill or food for the company cafeteria. It will be categorized on the government’s books as an investment, akin to constructing a factory or digging a mine. In another victory for intellectual property, original works of art such as films, music, and books will be treated for the first time as long-lived assets.

And:

The U.S. generates a disproportionate share of its wealth from the likes of patents, copyrights, trademarks, designs, cultural creations, and business processes. To see the intangible economy in numbers, look at Apple’s (AAPL) balance sheet: Property, plant, and equipment, those traditional forms of wealth from the industrial and preindustrial eras, account for $15 billion of its $400 billion market value—just 4 percent of the total. They’re only 7 percent of market value at moviemaker Time Warner (TWX) and drugmaker Pfizer (PFE).

And:

The BEA assigns an annual depreciation rate of 10 percent to pharmaceutical R&D assets, vs. 36 percent for computer systems design; 9 percent for movies, but 27 percent for music. In a priceless footnote, it writes: “Long-lived television programs include situation comedies and drama programs. Other types of television programs, including news programs, sporting events, game shows, soap operas, and reality programming, have much shorter service lives and will not be capitalized.”

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  1. Gordon Brooks says:

    Not sure about not capitalizing game shows. Ever seen The Game Show Network? Chuck Barris is probably still making royalties from that.

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  2. harvey says:

    So… now the US govt BEA is a TV critic, choosing what’s good (“long-lived”) on TV and what’s not via which TV shows can be capitalized and which cannot? Sitcoms yes, but soap operas and reality shows no??

    I generally favor these new rules. But their specific choices seem to be very subjective decisions best made by viewers, not Washington DC.

    That said, BEA is probably correct. Until somebody creates a Hunger Games…

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  3. Eric M. Jones says:

    Here’s my guess at recent history. Prior top WWII there was a huge R&D industry; Westinghouse, GE, Bell Labs, and hundreds of other R&D labs. These were usually, but not always, linked to manufacturing. During WWII, academia was linked to these labs due to urgent national needs, but after the war these connections did not return to their pre-war status, and the government continued to pour money into academic research. The cost of college educations began to reflect these non-teaching activities too.

    Lots of government money that should be paid to research labs for government research is paid to universities. Too bad in my opinion. Surely R&D labs should hire talent from the universities, but to have R&D within the university seems misplaced.

    Maybe recent policy changes will make more sense.

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  4. Mike MacDonald says:

    You could make the same argument for Coca Cola that was made for Apple, but how much R&D is going on there? The problem with treating R&D as an investment is that most of it doesn’t pan out. Is there a GDP input for “speculation”?

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  5. Gkm says:

    Mike has an excellent point. If the research doesn’t get developed, do you then write down the investment?

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  6. gashaw. d says:

    something is not clear for me. research and development expenditures are part of gov’t expenditure, ether they are capital or recurrent expenditure and they are rerecorded on GDP under the govet account so what is new and how they swell the GDP as if they were not part of it?

    and the other point i would like to raise is are we arguing that music, books, films are investment or expenditures ether they are investment or expenditure they have to be on GDP
    before in ether account !s o the same concepts with the above is not clear for me. please some one
    elaborate these tings for me. tanks

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