July 30, 2014

A New, Improved Definition of GDP

  • The national debt has grown significantly in recent years due to rising annual deficits. A deficit occurs in any year the government spends more...

The independent Bureau of Economic Analysis (BEA) has released a completely revised look at the size of the U.S. economy from 1929 to the first quarter of 2013. This comes after an accuracy review of its key economic measurements suggested a new definition for the nation’s Gross Domestic Product (GDP).

This new definition treats research and development and the production of entertainment -- among other things -- as investments rather than expenses. As a result the GDP for 2012 increased by $560 billion, to $16.2 trillion. About $400 billion was related to R&D and $74 billion to entertainment.

Because the accrual of defined benefit programs was also added ($13 billion in 2012), the personal savings rate is now higher than previously thought.

For budget wonks, a key change is that the 40-year average size of government was adjusted from 21.0 percent of GDP to 20.4 percent. In addition, average government revenues went from 17.9 percent of GDP to 17.4 percent, and average deficits from 3.1 percent to 3.0.

While “debt held by the public” also shrank as a percentage of the economy, the fundamental fiscal challenge -- the projected increase of the debt-to-GDP ratio in the future -- remains unchanged. Any undue focus on small percentage changes in GDP would be a distraction from the real action needed on fiscal policy.