GDP: Does Lady Gaga Count?

by Elaine Schwartz    •    May 29, 2013    •    1311 Views

The United States just got a little richer but not because of the economic recovery. We are just changing what is included in the GDP.

First a little history.

I have always been fascinated by the story of Simon Kuznets. A Russian immigrant who received the 1971 Nobel Prize in Economics, Dr. Kuznets had been the head of a statistical office in the Ukraine before he arrived in the US in 1922. Within 5 years, he was 26, had a Ph.D from Columbia and a job at the National Bureau of Economic Research.

During the 1930s, led by Dr. Kuznets, a group of government economists developed a framework for national income accounting. Sometimes called a national balance sheet, national income data display the value of all that is produced and the incomes that producers earn. By knowing the growing or declining value of what was produced, statisticians can identify economic strengths and weaknesses, learn about business, government and household spending, and make projections. Then lawmakers could have more information on which to base policy decisions.

Identifying the content of national income accounts, Dr. Kuznets decided that only legally produced goods and services that were bought and sold would be included. So, when you paint your own bedroom, your service (as a painter) is not a part of the GDP but the paint you buy is. However, when a painter is hired to do the same job, it is counted. They also decided not to count “intermediate goods” like the flour that goes into a pretzel because the final selling price of the pretzel included the flour.

Similarly, until now, research and development and the money spent on producing music, were considered “intermediate” and not counted separately. All of that will change on July 31, 2013 when the money spent to develop a new kind of missile or flavor or to understand the human genome will be counted directly in the GDP as “intellectual property products” in the fixed investment category. Included in the change is a provision that music and entertainment and TV show product costs will also be directly added to the GDP.

So, that means that any money Lady Gaga spends in the US to develop a musical production could very well elevate our GDP.

Amazingly, the BEA (Bureau of Economic Analysis) decided also to retrofit their calculations and add intellectual property to GDP totals starting in 1929. As a result, almost a century of GDP totals will increase. (I do wonder about accuracy.)

Our bottom line? Just knowing what the GDP is…so you might want to watch this excellent 5 minute video from Slate and Planet Money’s Adam Davidson:

Sources and Resources: The BEA papers on the change are actually quite readable if you want to see the specifics of what they are doing. In addition (and a hat tip to) this WSJ article. It was the source of my Lady Gaga reference and my introduction to the topic while I read more in this brief and thought provoking Reuters blog. Finally, here, econlife looked at the story of how national income accounting helped us win WW II (from which I included a brief excerpt above).

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