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Sunday, August 11, 2013

What would be India's GDP if investment in IT and intangibles is factored

The US economy will officially become 3 per cent bigger in July as part of a shake-up that will see government statistics take into account 21st century components such as film royalties and spending on research and development. Billions of dollars of intangible assets will enter the gross domestic product of the world’s largest economy in a revision aimed at capturing the changing nature of US output. A brief look at the emerging scenario:

Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach. The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The production approach is also called Net Product or Value added method. This method consists of three stages:
1.           Estimating the Gross Value of domestic Output out of the many various economic activities
2.           Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and finally
3.           Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.
Both firm-level and national income accounting practice have historically treated expenditure on intangible inputs such as software and R&D as an intermediate expense and not as an investment that is part of GDP.  Now, this exclusion of intangibles is increasingly questioned. Economists in USA pointed that business investment in intangibles is a vital aspect of business activity, and the investments shown below represent a large and growing portion of the overall economy
  • Computerized information (mainly computer software)
  • Scientific R&D
  • Non-Scientific R&D

o   Cost of development of new motion pictures, films and other forms of entertainment.
o   Investment in new designs
o   Estimation of product development by financial services and insurance firms.
  •  Investment in Economic Competencies

o   Spending on strategic planning
o   Spending on redesigning or reconfiguring existing products in existing markets,
o   Investment to retaining market share
o   Investment in brand names
o   Employee training.

The rapid expansion and application of technological knowledge in its many forms (research and development, capital-embodied technical change, human competency, and the associated firm-specific co-investments) are key features of recent U.S. economic growth. Accounting practice traditionally excludes the intangibles component of this knowledge capital and, according estimates exclude approximately $1 trillion from conventionally measured non-farm business sector output by the late 1990s and understates the business capital stock by $3.6 trillion.

Can we expect our GDP estimates to be revised likewise?

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