Why the reform of US GDP calculation just announced is not bold enough

According to the Financial Times the US Bureau of Economic Analysis is going to revise the calculation of US GDP. Next to incorporating royalties from creative works the revised GDP measure will also take into account spending on research and development (R&D). This is thought to push a new international standard, with the US being one of the first adopters.

So, what difference does that make?

First of all, let’s have a look at how GDP is calculated: There are three ways of determining GDP – based on production, income and expenditure. In the expenditure approach GDP (Y) is Y = C + I + G + (X − M); a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).

This article by Businessweek makes clear that, until now, government and personal spending on education and “[a]cademic and government spending on research and development … go into the consumption bin”, whereas business R&D spending and worker training expenses mostly go into the intermediate output bin – and the items from the intermediate output bin are not counted towards GDP “because it’s assumed that they’ve been rolled into either consumption or investment”.

Thus, a large part of what could actually be deemed an investment simply disappears from GDP! This is what the US Bureau of Economic Analysis (BEA) wants to reform now.

However, once the BEA is about to reform GDP calculations, one might also ask whether it is appropriate to count government and personal spending on education and academic and government spending on research and development towards the consumption bin and not also towards the investment bin. Well, of course, at least it is counted towards GDP and doesn’t just vanish somewhere along the calculation. However, the categories of consumption and investment do carry different meanings in  macroeconomic policy discourse. And here it would be highly questionable whether it is justified to privilege private firms’ R&D expenses over academic and government R&D and those incurred for the education of individuals. In a standard economics textbook Samuelson and Nordhaus [zotpressInText item=”{GD4QAZZT,525}” format=”(%d%, %p%)”] state that

saving and investment… play a central role in a nation’s economic performance. Nations that save and invest large fractions of their incomes tend to have rapid growth of output, income, and wages … By contrast, nations that consume most of their incomes … experience low rates of growth of productivity and real wages.

Taking this into consideration, it doesn’t seem to make a lot of sense to treat spending on education and research and development as “consumption”.

Also, and perhaps most fundamentally, the announced reform of US GDP calculation raises the question whether it would not be about time to also take into account factors relating to the preservation or destruction of the environment into the calculation of economic performance. If this remains excluded, one may well find that today’s economies float atop a string of fragile bubbles whose bursts will be rather unsettling — to put it mildly.

In recent years, there has been quite a lot of debate surrounding either ecological adjustments to the GDP or the establishment of “satellite” indicators [zotpressInText item=”{2PTHW3AE},{DVPSW2US},{SAAZGWMG}”].

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While certainly less flattering than adding investments into creative works and R&D to the GDP, efforts to take the interactions between the economy and the environment into account would provide for a more realistic picture of long-term human development.


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