Living Economics

If you go to a movie, the price of the snacks and the ticket is included as part of the gross domestic product (GDP). If a farmer buys a tractor, the tractor price is also included in the GDP. But your movie experience is regarded as a consumption flow that perishes when the movie is over, while the tractor is regarded as an investment stock that depreciates only over a number of years.

A rich country with a high GDP like the U.S typically has a large consumption flow, but it also has a large investment stock. Buildings, roads, and bridges are visible specimens of this capital stock. But some movies and long-lived TV shows generate revenues from re-runs over time (BW). As do other intellectual property like patents and software. In other words, they are capital stocks much like the farmer's tractor. Historically, the production costs of these "intangible stock" has been treated as intermediate expenses, much like paper clips and electricity, for the year they were created. But as the economy has become more service-oriented, such a GDP accounting practice runs the risk of excluding an increasing share of its capital investment.

The US Bureau of Economic Analysis (BEA) has decided to include the production costs of some of these "intangible assets" as capital investment to be depreciated over time. The end result of including what were formerly regarded as intermediate expenses as capital investment is to boost GDP by about 3.6% in 2013 (NY Times).

This change in accounting is long over-due, but it also reminds us how arbitrary and slippery are the defined boundaries. For example, among TV shows, "Seinfeld" qualifies but "America's Got Talent" does not. Pharmaceutical R&D costs qualify, but not costs in brand building, worker training, and improvement in organizational practices (BW). Such arbitrariness is also evident in the allowable annual depreciation rates. For example, 27% for music but 9% for movies.

While such arbitrariness is puzzling, it glosses over the most glaring omission of them all. Namely, the environment is not regarded as a capital asset subject to depreciation (read degradation) over time (NY Times).

This accounting boost to GDP will raise the per capita income of an average American. But his paycheck stays the same because income distribution is not directly determined by per capita GDP.