How GDP Is Calculated Changes on Wednesday
WASHINGTON -- On Wednesday, how U.S. gross domestic product is calculated will be revised. Among the revisions are major changes in computing the final goods and services shown as produced in the economy.
That means economic output will be about 3% higher than under the old method. But it doesn’t necessarily mean the economy is growing any faster or slower, said Jack Kleinhenz, chief economist at the National Retail Federation. Rather, it means the government is using different economic factors and statistics in its determination and definition of GDP.
After Wednesday, GDP will include spending on research and development along with the production of artistic goods and entertainment such as television shows, recorded music and movies, Kleinhenz explained. It will also include changes in how defined-benefit pension plans are treated. Research and development, for instance, has been considered a cost of doing business but with the new classification it will be defined as an investment no different than spending for a building, equipment or software.
The economic value of a Harry Potter movie under the old method showed up in GDP only through the personal consumption expenditures on movie tickets or DVD sales in a given period. Under the new definition, the cost of producing the film would also be part of GDP as an investment that contributes to the production process over decades.
All of the planned changes to how GDP is calculated seek to recognize these expenditures and parts of the economy (intellectual property, for example) as important contributors to overall economic growth. To make historical comparisons valid, the changes will be incorporated all the way back to 1929.
This new accounting standard is being adopted around the globe, and the United States is one of the first countries to adopt this standard for national economic statistics. The European Union is also moving in this direction, Kleinhenz said.
For retailers, business owners and decision makers whether in Washington or Wall Street, GDP statistics are an invaluable resource that captures the direction and trends of the components of the economy. While many of these changes are technical in nature and of interest mostly to those who closely follow the numbers, everyone depends on these data.
Kleinhenz said the impact on retail sales data won't be known until after the end of July when the changes are fully implemented. But, he added, "These GDP revisions will significantly impact the way in which we measure the U.S. economy and will surely have ripple effects on every major industry, including retail. However, the GDP revisions are a much-needed improvement to the current calculations and will capture a larger slice of economic growth and activity."
Published by The Business Journal, Youngstown, Ohio.
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