U.S. economy set to grow 3 percent -- on paper
(MoneyWatch) The U.S. economy is set to see a major growth spurt in July -- at least on paper. That's when the government will start including so-called economic intangibles, like film royalties and spending on research and development, in how it calculates the size of the economy.
The change by the Bureau of Economic Analysis will increase the nation's gross domestic product by 3 percent -- an amount equal to the total GDP of Belgium. It is part of an effort by the U.S. government to capture aspects of the economy that are now omitted and thus better measure the nation's economic output.
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Currently R&D spending is figured as a cost of doing business. This means the final output of a Ford Mustang is included in the GDP, but all the money that goes into engineering and design isn't. Under the new system these R&D costs will count as an investment, and this alone will add about 2 percent to the size of the economy. Creative works -- movies, TV, books, music and theater -- are expected to add another half-percent to the GDP.
Not everyone is happy about the proposed change. For one thing it will be applied retroactively. Brian Moulton, of the Bureau of Economic Analysis, admits that it is rewriting economic history but believes it will present a better picture of what actually took place.
Critics also complain that the unilateral move will make it impossible to compare U.S. figures with those from other nations. If so, it shouldn't be for long. Because America sets the standard for GDP measurement, other countries are likely to change their statistics as well.
There are also concerns that the new method will result in double-counting some economic activity. While no one doubts the value of these intangible assets, some economists believe they are already accounted for under the old methodology as "brand value."
Brand value represents the present value of a branded product compared to the value of the same product sold without the benefit of that brand. For example, though there are many tablet computers on the market, the Apple iPad is the biggest seller. The quality of the product is what has made the brand so powerful in the eyes of consumers. At the same time, consumers are willing to buy new products just because of the Apple name. Both of those qualities -- the value of the brand -- are based on R&D spending.
