How the US economy is being recalculated
- 31 July 2013
- From the section Business
The way the US economy is measured has changed, to include the amount spent on intellectual property outlays such as pop song production and drug patents for the first time.
"GDP is probably the single most important statistic affecting businesses, households, and governments," says Steve Landefeld, director of the Bureau of Economic Analysis (BEA), which measures gross domestic product - the total amount of goods and services produced in the US economy during a given quarter.
Calculating GDP, he says, is incredibly difficult, because "it's a continually changing economy that we're chasing".
Now, in what the BEA says is the biggest change in the calculations since 1999, the way that US economic activity is reported has been updated.
The goal is to finally include something many have already noticed: the shift away from the production economy of factories and farms towards the knowledge economy - the investment and economic production in intellectual property, which includes everything from the amount spent on writing a hit TV show to researching a cancer cure.
Why are the calculations changing?
Think back to 2007. It was the year of the franchise: Spider-Man 3 and Shrek the Third topped the box office.
For economists, these films were some of the most mysterious products created in the US economy that year.
Although revenues from the box office, as well as DVD sales and TV subscription fees, were included in the GDP calculations, not a single cent spent on making these films - or any song or TV show ever made - has been included in the way economists calculate GDP.
In fact, the BEA estimates that in 2007, the total amount spent on producing creative output such as films, TV and music was $70bn (£46bn at today's exchange rates).
However, because of the way GDP was calculated at the time, none of that was included in the output figure.
If you added in the amount spent on research and development - such as producing a new blood pressure drug or computer chip - that's another $300bn that wasn't counted.
Now, those expenditures, as well as tweaks to how pensions are calculated as part of economic activity, will be included in the figures.
How do you measure the value of "Single Ladies"?
It's easy enough to understand how the investment in Beyonce's latest single contributes to the US economy (beyond the dance moves, of course). Songwriters are hired, studio managers put in extra hours and so on.
But putting an actual figure on how much is invested is "really hard", says Mr Landefeld, particularly when it comes to the economic contribution of intellectual property such as patents and copyrights.
"This stuff is not bought and sold in markets. You don't say: 'Hey, I need a patent for a new drug, let me go out and buy one.'
"There's no marketplace, like there might be for a new building to evaluate prices."
So the statisticians at the BEA have tried since 2005 to figure out the best way to tabulate the economic output of all of the intellectual property production that we can intuitively tell is going on around us.
They've essentially created approximations of pricing models, using input from businesses and leaders around the globe.
"The most similar change we did to this was back in 1999, when we first capitalised [included in GDP] computer software," says Brent Moulton, head of national accounts at the BEA and the man tasked with creating and implementing the GDP revision formula.
"I think we learned that it would be better to first develop this type of estimate where we could go around and talk to users and experiment with different approaches."
Adding $370bn to the US economy seems like a lot. What's the impact of these changes?
"Overall it's a very significant addition to GDP - around 2.5%," says Mr Landefeld.
Some claim that the decision might be seen as a political ploy by the Obama administration to inflate the US economy - although this is a view that's widely been discredited.
But on the other hand, the impact won't be as big as you might expect, as it's not just this quarter's GDP figure that is being recalculated: all the data, going back to 1929, is getting updated.
So while the overall size of the economy will appear bigger, there will not be a significant change in the growth rate.
"What [GDP revisions] probably won't do is change our picture of the momentum in the economy - these changes probably aren't going to have a big effect on that," says Lewis Alexander, chief US economist at Nomura and a former adviser to US Treasury Secretary Timothy Geithner.
But Mr Landefeld of the BEA does think that by acknowledging the role that research and development plays in economic production, the numbers could help organisations, such the US government, in better estimating the impact of funding choices on areas such as the National Science Foundation in the future.
"A large range of public and private decision-making will be affected by this and informed by this," says Mr Landefeld.
How does this compare with the way GDP is calculated in other countries?
Part of the reason for the change in calculations has to do with a co-ordinated effort among the world's biggest economies to standardise the way their economic output is calculated. The approach came out of what is known as the System of National Accounts, which happened in 2008.
Already, Australia and Canada have started implementing similar changes, and the European Union and the UK are set to follow suit.
"As the world becomes more and more global, it's just harder to track down these production relationships," says Mr Moulton.
"You hear about production taking place all around the world and it's really hard to sometimes take that global production process and figure out how much can be attributed to a particular economy."
The hope is that by better co-ordinating measurements, a clearer picture of both global economic growth can be created, as well as more accurate data that can help world leaders better co-ordinate policy.