Revising The Calculation Of GDP: Fuzzy Accounting Raises Red Flags

Apr. 24, 2013 11:25 AM ET12 Comments
Alpha Shark profile picture
Alpha Shark
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Background

The US Bureau of Economic Analysis (BEA) recently announced that starting in the 3rd quarter 2013 it will be revising the way it calculates Gross Domestic Product (GDP). The link is here.

This revision involves adding various intangible assets such as research and development (R&D) costs, creative works and unfunded pension plan amounts into the GDP calculation. The BEA stated this change is being made due to the "changing nature of US output" but it appears to be another Orwellian tactic on the part of government to mask the true health of the US economy.

How GDP is Calculated

GDP can be calculated in one of three ways:

1 - Expenditure Method

2 - Income Approach

3 - Production Approach

Per the BEA: "In general, the source data for the expenditures components are considered more reliable than those for the income components." These expenditures components are as follows:

GDP = private consumption + gross investment + government spending + (exports − imports), or

GDP = C + I + G + (X - M)

GAAP Accounting - The Conservative Approach

  1. Per Generally Accepted Accounting Principles (GAAP), R&D costs are expensed as incurred due to the difficulty in:
  1. Identifying the costs associated with the particular project or activity
    1. Determining the magnitude of the future benefits and length of time over which such benefits may be realized.
  1. Creative works would likely be classified under GAAP as internally-created intangibles. Per GAAP, internally-created intangibles are generally expensed as incurred. The argument is that many of the costs incurred internally to create these intangibles bear no relationship to their real value. In addition, it is difficult to associate costs to specific intangible assets. Therefore the only costs not expensed for internally-created intangibles are direct costs such as legal costs.
  1. Simplified as I am not

This article was written by

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My extensive experience working overseas has provided a solid foundation for my investment philosophy. I have found that travel is a far better teacher than a conventional education. The experiences and knowledge one gains on the ground around the world cannot be taught in any classroom.

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