The latest film you enjoyed at your local theater may have cost $100 million or more to create, and much of that money was spent in communities where the film was shot or paid to people who worked on it. Until recently, however, those expenditures were not counted in U.S. gross domestic product (GDP). This changed on July 31, 2013, when the Bureau of Economic Analysis (BEA) released the results of a comprehensive revision to the way GDP is calculated.
The most significant change is the inclusion of business research and development (R&D) and the costs of creating intellectual property such as films, television shows, and books. In the past, these expenditures were considered “the cost of doing business” and only end payments, such as the money you pay at the ticket window or at your local bookstore, were counted in GDP.
Measuring Economic Output
GDP attempts to measure the total value of goods and services produced in the United States. Consumer expenditures typically account for almost 70% of the total. [1] Other major components include business capital investment, government spending, and net exports (the value of exported goods minus the value of imported goods).
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Expenditures for R&D and artistic production will be combined with software expenditures in a new business investment category called “intellectual property products.” A different accounting method for company pension plans and the addition of certain transfer costs for real estate transactions are among other changes.
Shifting Perspective
The revised calculations make GDP about 3.6% higher in 2012. [2] That doesn’t mean the economy got any bigger, but it does provide a different perspective on economic trends. To allow more meaningful comparisons, the BEA has adjusted GDP all the way back to 1929 and updated the base year for comparisons from 2005 to 2009 dollars.
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The new figures suggest that the 2007–2009 recession may not have been quite as bad as previously calculated, and the recovery may be progressing at a slightly better pace (see chart). These are subtle differences — the recession was still severe and the recovery is still slow — but BEA officials believe the new GDP calculations more accurately reflect the modern U.S. economy.
Although GDP is far from a perfect measure, it can play a significant role in economic decisions. The Federal Reserve considers GDP growth, along with unemployment and inflation, when making decisions about monetary policy. The GDP also may influence decisions and actions by other government entities and private businesses.
The stock market often reacts to GDP reports, but as an investor it’s important to keep these trends in perspective and remember that measuring GDP is an ongoing process. The BEA typically releases three estimates of GDP for a given quarter or year, and as the recent adjustments demonstrate, even “final” numbers might be changed.
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1–2) U.S. Bureau of Economic Analysis, 2013
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2014 Emerald Connect, LLC.
