# Change to GDP calculations? **URL:** \ **Category:** Factual Questions\ **Created:** [April 25, 2013, 2:20pm UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663 "2013-04-25T14:20:48Z")\ **Posts on this page:** 10\ **Page:** 1
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [April 25, 2013, 2:20pm UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663/1 "2013-04-25T14:20:48Z")
On NPR this morning there was a story about changes to how GDP is calculated. The reporter said they were going to start including the value of time spent on intangible products like songs and software. So for example, the value of time Lady Gaga (their example) spends composing a song would be added to GDP. Can someone explain this to me? I thought GDP was the value of final products, which are traded in the marketplace. How would you even begin to estimate the value of the time Lady Gaga spends composing a song? ---
**Author:** ![Freddy\_the\_Pig](https://avatars.discourse-cdn.com/v4/letter/f/a587f6/32.png) [@Freddy\_the\_Pig](https://boards.straightdope.com/u/Freddy_the_Pig)\ **Post date:** [April 25, 2013, 4:00pm UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663/2 "2013-04-25T16:00:54Z")
[Linkety-link.](http://www.npr.org/blogs/money/2013/04/25/178901118/lady-gaga-writing-a-new-song-is-like-a-factory-investing-in-a-new-machine) You’re right; GDP measures only final goods and services. Investment goods, however, are considered final. For example, if a company buys or builds goods as inventory, for later resale, they are not included in GDP. They will be included when sold, at retail. However, if a company buys a machine–a capital investment–which will be used to produce other goods over time, that is included in GDP. It is as “final” as machines get. The machine is then depreciated over time, subtracting from GDP in future years. This GDP change is saying that creative production is more like investment in a machine and less like inventory. Lady Gaga produces a song in 2013, of which she will realize only a little revenue in 2013, but much more over time. How to value it? That’s easy–what would it cost to buy the rights to future royalties from the song? She may not be putting a particular song up for sale, but other artists are putting similar songs up for sale, so value can be estimated. Just as your house can be valued even if you’re not selling it this year. The song will then need to be depreciated over time, else it would be double counted. Don’t ask me how to do this. I don’t know. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 26, 2013, 6:48pm UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663/3 "2013-04-26T18:48:53Z")
[Here’s an article from Forbes that explains what’s going on.](http://www.forbes.com/sites/larahoffmans/2013/04/24/faster-gdp-different-rules/) > [@](#): > > And, here we go again. The next accounting change, to be rolled out in July and retroactive to 2007, could lead to corporate profits looking bigger and GDP growth seeming faster (operative words being “look” and “seem”). [Major accounting changes](http://www.bea.gov/scb/pdf/2013/03%20March/0313_nipa_comprehensive_revision_preview.pdf) will include reclassifying corporate research and development costs as “fixed investment” rather than an expense, including changes in value of movies, music and the like, and separating pension funds out from personal income to measure GDP impact based on what the employer has promised to pay as opposed to just measuring annual pension costs. > All fine! Maybe better, even. And within the BEA’s purview. However, neither the 2013 nor the 1995 change alter the economy—not an iota. Which further illustrates why [GDP isn’t direct reflection](http://www.forbes.com/sites/larahoffmans/2012/08/02/stock-returns-versus-gdp/) of economic health. ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [April 27, 2013, 1:04pm UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663/4 "2013-04-27T13:04:44Z")
> [@Freddy\_the\_Pig](#): > > For example, if a company buys or builds goods as inventory, for later resale, they are not included in GDP. They will be included when sold, at retail. That’s not correct. [Inventory investment](http://en.wikipedia.org/wiki/Inventory_investment) is part of GDP. The point of GDP is to measure production, and since inventories measure actual production, they count in the calculations. An increase in inventories due to abnormally low demand is considered unexpected investment. > [@Freddy\_the\_Pig](#): > > The machine is then depreciated over time, subtracting from GDP in future years. This is also incorrect. GDP is **gross** , not net. It’s NDP, [Net Domestic Product](http://en.wikipedia.org/wiki/Net_domestic_product), that counts depreciation. Essentially no one uses this measure, because depreciation is so hard to measure correctly. The company books don’t help with an accurate measure, since the accountants’ job is to depreciate as quickly as the legal schedule allows for tax purposes. > [@Freddy\_the\_Pig](#): > > The song will then need to be depreciated over time, else it would be double counted. Don’t ask me how to do this. I don’t know. Again, there will be no depreciation. There is also no worry about double counting. The initial investment will be the time Lady Gaga spent creating the song. This will count for GDP. The subsequent sales of the song to eager fans will count as GDP consumption. This is in the same sense that building a house is an investment, and is counted as such, while living in the house month after month is consumption, and is counted as such. There’s no double counting going on anywhere here. To build a house and to live in it are two different things, just as it’s two different things to put in the creative effort to make the song, and then to buy and listen to it. There wouldn’t be any depreciation in an NGP measure, either. A song can’t decay in the same way a house can burn down. ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [April 27, 2013, 1:30pm UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663/5 "2013-04-27T13:30:43Z")
> [@LinusK](#): > > How would you even begin to estimate the value of the time Lady Gaga spends composing a song? Technically, the most accurate way of doing this would be to find the proper opportunity cost. We would put a price tag on Lady Gaga’s time, along with that of her collaborators and renting the equipment. The number of hours she spends composing is time she isn’t making money from concerts. The concert money she gives up by spending time in the studio is the correct “cost”. No way in hell they’ll try to do that, though. I’m fairly certain they’ll measure this by how much money she and her producers spend renting studio time and paying technicians and backup musicians and all those other folks. There will be clear paperwork for all this stuff. Same for R&D investment. Right now R&D is just a business expense and doesn’t get counted, but when they make the change, they can measure the cost of the laboratory equipment, salaries for researchers, etc, and put that final tally in the GDP calculation. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [April 28, 2013, 3:11pm UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663/6 "2013-04-28T15:11:31Z")
> [@Hellestal](#): > > Technically, the most accurate way of doing this would be to find the proper opportunity cost. We would put a price tag on Lady Gaga’s time, along with that of her collaborators and renting the equipment. The number of hours she spends composing is time she isn’t making money from concerts. The concert money she gives up by spending time in the studio is the correct “cost”. No way in hell they’ll try to do that, though. > > I’m fairly certain they’ll measure this by how much money she and her producers spend renting studio time and paying technicians and backup musicians and all those other folks. There will be clear paperwork for all this stuff. Same for R&D investment. Right now R&D is just a business expense and doesn’t get counted, but when they make the change, they can measure the cost of the laboratory equipment, salaries for researchers, etc, and put that final tally in the GDP calculation. It’s pretty easy to see how you could count a factory, or the machines in a factory, as final goods, and count them as investments. But when you start looking at someone’s time as an investment, it starts to get tricky. If Lady Gaga’s composition of a song is an investment in a song, why not count a sculptor’s sculpting of a sculpture as an investment in the sculpture? Or a brickmaker’s making of a brick an investment in the brick? ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [April 28, 2013, 4:53pm UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663/7 "2013-04-28T16:53:24Z")
> [@LinusK](#): > > It’s pretty easy to see how you could count a factory, or the machines in a factory, as final goods, and count them as investments. > > But when you start looking at someone’s time as an investment, it starts to get tricky. If Lady Gaga’s composition of a song is an investment in a song, why not count a sculptor’s sculpting of a sculpture as an investment in the sculpture? Or a brickmaker’s making of a brick an investment in the brick? The cost of a brick is already included, as part of the final price of the building it belongs to. The sculpture is an interesting question. Different ways to look at it. The practical way for calculation purposes is to say that an artist selling a sculpture to a collector is pretty clearly selling a consumer good, to be classed under “consumption”… but in a more precise sense, that isn’t right. Properly seen, the art work is an investment good, which will produce a steady flow of consumed aesthetic appreciation for as long as it exists. But that would be a pain in the ass to try to estimate. There’s no clear dollar price for soaking in beauty like that so they let it slide. Call it “consumption” and have done. There’s a notable calculation difference between a single object like a statue that can only be sold once, and something like a film that creates a tangible, recordable flow of income to its owners over time. Since they have the paperwork, they can count up both the value of the production as an investment, and then count the value of the ticket sales as consumption. So hey, that’s what they’ve decided to do. Theory would dictate doing the same thing for the statue, but these boundaries are always ultimately decided by practical matters. This change is a step toward more precision, but perfection will always be impossible. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 28, 2013, 6:43pm UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663/8 "2013-04-28T18:43:54Z")
You know . . . BEA has a [27 page document](http://www.bea.gov/scb/pdf/2013/03%20March/0313_nipa_comprehensive_revision_preview.pdf) that thoroughly describes their methodology. For example: > [@](#): > > Current treatment > > Currently, expenditures for private R&D are not recorded as final expenditures in the calculation of gross domestic product (GDP). Expenditures for purchased R&D are classified as intermediate inputs, and the costs of producing own-account R&D (that is, production of R&D by an enterprise for its own use) are simply included with the other costs of production and are not identified as contributing to the output of a separate commodity. For nonprofit institutions serving households (NPISH) and for governments, whose production is derived using a production-cost approach, expenditures for R&D are included in consumption expenditures but generally are not separately identified. In addition, BEA’s estimates of exports and imports of services include R&D services. > > New treatment > > The new treatment will recognize expenditures for both purchased and own-account R&D by businesses, NPISH, and general governments as fixed investment and the depreciation of these assets in consumption of fixed capital (CFC). 10 Government R&D expenditures will be treated as investment regardless of whether the R&D is protected or made freely available to the public, because the provision of public services is part of the economic benefits generated by government R&D.11 > > Measuring R&D output. > > Conceptually, the value ofan enterprise’s R&D is equal to the present value of the future benefits that the company derives from the R&D. In practice, because future benefits are not observable and most R&D is produced on own-account, the standard approach is to measure the activity as the sum of production costs. Using data from National Science Foundation (NSF) surveys of R&D expenditures by performer, BEA will estimate the production costs associated with spending for R&D to derive annual current-dollar estimates of R&D output; table 3 lists several of the NSF surveys that will be used to estimate R&D output ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [April 29, 2013, 12:24am UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663/9 "2013-04-29T00:24:22Z")
> [@deltasigma](#): > > You know . . . BEA has a [27 page document](http://www.bea.gov/scb/pdf/2013/03%20March/0313_nipa_comprehensive_revision_preview.pdf) that thoroughly describes their methodology. For example: Thanks for the link. One confusion might be “Consumption of Fixed Capital” as depreciation. In my previous post, I thought people were assuming that depreciation was _subtracted out_ of GDP, which isn’t right. I want to emphasize that the depreciation here counts as the consumption of that resource and thus _increases_ GDP wherever it’s counted. I also have to admit that I haven’t looked at this in a while, and I thought they didn’t bother trying to measure that. Ah but they do, and it makes up a decent chunk of change. Yet another error in my posts: they really are going for guesstimation of NPV of those assets. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 29, 2013, 12:41am UTC](https://boards.straightdope.com/t/change-to-gdp-calculations/656663/10 "2013-04-29T00:41:29Z")
I hadn’t thought about it but now that you mention it, it occurred to me if they handle short-lived items differently - just like for tax purposes, you can expense certain capital goods if they have a limited useful life. I didn’t read the whole section, but it sounds like they’re doing something of a compromise. > [@](#): > > \*\*Depreciation of newly recognized assets. \*\*The depreciation of R&D fixed assets will be included in consumption of fixed capital, which is the economic charge for the decline in value of fixed assets as they age. R&D depreciation rates are critical for calculating the rates of return to R&D investments and capital service costs. As with measuring R&D production, measuring R&D depreciation rates is difficult because market values are generally unobservable. > > For business depreciation of R&D, unlike tangible assets that depreciate over time from physical decay or wear and tear, R&D depreciation reflects its declining contribution to a firm’s profit as R&D assets become less valuable or obsolete. Based on this understanding, BEA analyzed the relationship between investment in R&D and future profits using firm-level data and establishment-level data. Using this forward-looking profits model, in which each period’s R&D investment contributes to the profits in later periods but at a geometrically declining rate, BEA derived R&D depreciation rates for certain R&D intensive industries.15 NPISH R&D depreciation will be based on estimates of business depreciation.