Frequently Asked Questions

Guidelines for Citing BEA Information | ID: 1028 | Created: Jul-31-2013
Answer

How did BEA change the treatment of spending for research and development during the 2013 comprehensive revision?

BEA recognized expenditures by business, government, and nonprofit institutions on research and development (R&D) as fixed assets and recorded R&D spending as investment in gross domestic product (GDP) as part of the comprehensive (or benchmark) revision of the national income and product accounts (NIPAs) released on July 31, 2013.  Previously, these expenditures were treated as intermediate inputs and not included in GDP. This improvement reflects the most recent international guidelines for the compilation of national accounts—the System of National Accounts 2008 (SNA). These guidelines facilitate international comparisons of national economic statistics and serve as a guide for countries as they develop their economic accounting systems. As part of its mission, BEA supports the goal of the international harmonization by adopting the SNA guidelines to the extent that is feasible. BEA produced experimental estimates of R&D as investment in an R&D satellite account, first published in 1994 and updated in 2006, 2007, and 2010. This work laid the foundation for the changes incorporated during the comprehensive revision. Answers to some common questions about the concepts and data are presented below. [1]

Why is R&D spending being treated as investment?

In the previous NIPA approach, expenditures on R&D by business—whether actually purchased from others or carried out in-house (also called “own-account”)—were treated as intermediate, or current, expenses used up during production of other goods and services rather than as final expenditures of assets used over and over again in production and included in the measure of GDP. R&D has long been recognized as having the distinguishing features of fixed assets:  it is a produced asset using labor and capital resources; it has defined ownership rights; it is used repeatedly in the production process; and it has a useful life of more than one year. The previous NIPA treatment did not allow one to easily assess R&D’s contribution to economic growth. By adopting the new treatment, R&D is treated as an investment that generates future income and product.

How is R&D valued?

Ideally, to document the role R&D plays within the economy, BEA would measure the market value of R&D created. In most cases, however, observed market transactions and dollar values for this output do not exist. Conceptually, the value of R&D is equal to the present value of the future stream of benefits derived from R&D spending. In practice, because future benefits are not observable, and most R&D assets are produced on own-account, BEA measures R&D activity as the sum of its production or input costs. BEA currently also uses this approach for other nonmarket components of GDP.

Where does R&D show up in the NIPAs tables? 

R&D spending is presented in a new asset category entitled “intellectual property products” within nonresidential gross fixed private domestic investment and government gross investment. “Intellectual property products” also includes software and private investment for entertainment, literary, and artistic originals.  For further detail on where these presentational changes appear, see the "Preview of the 2013 Comprehensive Revision of the National Income and Product Accounts: Changes in Definitions and Presentations" article in the March 2013 Survey of Current Business.

How is R&D financed by government treated in the NIPAs? 

R&D services purchased by government and R&D performed on own-account are recorded as investment by that level of government—federal or state and local.  R&D funded by government grants to private or other government institutions is recorded as investment by the government that provides the grant.

If firms engage in R&D to develop new products and services that are already counted in GDP, isn't including R&D as investment in GDP double counting?

GDP measures the value of goods and services produced for immediate consumption by persons and governments and of capital formation by businesses and governments. New capital formation adds to the capital stock and is used to produce other goods and services over many time periods. By capitalizing R&D in the NIPAS, R&D is treated like any other type of tangible asset. Because spending on R&D is considered an investment that generates future income and product, it is not double counting to include these expenditures in GDP. All expenditures for fixed investment (capital formation) create assets that are used to produce other goods and services over a long period of time.

Today's R&D expenditures could be for products that might take years to develop. How does that create value today when the first sale might be years off?

By treating R&D like other types of fixed investment, the investment in R&D affects the national accounts both in the period when it is purchased and in subsequent periods, because the asset provides a stream of capital services to the firm over a long period of time.

What about research that leads to nothing?

BEA has no specific information on the value of unsuccessful R&D and treats all research as contributing to the stock of knowledge. This treatment is symmetric with unsuccessful investments in physical capital including unsuccessful oil wells, equipment that is faulty, equipment that is prematurely scrapped due to rapid shifts in technology, or equipment and structures that are left idle or scrapped due to changes in demand or business closures.  All investments in intangible and tangible assets, successful and unsuccessful, need to be counted in calculating the overall returns on investment.

What about R&D performed abroad?

Under the new treatment, BEA recognizes domestically-performed R&D as U.S. assets and excludes R&D performed abroad by foreign affiliates of U.S. companies. BEA also recognizes the sales and purchases of R&D assets, such as patents, in its measures of exports and imports. When possible, BEA will try to separately identify these transactions and classify them as acquisition or disposal of R&D assets. Currently these transactions are included in exports and imports of royalties and license fees.

Can I still use prior economic research based on the old data?

BEA revises its GDP estimates to varying degrees every year, incorporating revised source data and sometimes changing what the GDP measure encompasses. While it is sometimes possible to pull old vintages of GDP estimates prior to such changes, BEA does not continue to produce GDP estimates on the new and old basis. This latest change to the definition of GDP does not substantially change to the picture of long-term economic growth or of economic business cycles, and thus, research on these topics remains relevant.

 

1 A series of articles in the Survey of Current Business discusses the upcoming revision in detail; these articles and other information about the revision are available on the BEA Web site at www.bea.gov/GDP-revisions

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