Looking Ahead: 2013 NIPA Comprehensive Revision Brent Moulton BEA Advisory Committee Washington, DC May 11, 2012

Overview ▪ Last May, we introduced tentative plans for 2013 comprehensive revision. Now we are able to provide more detail on the proposed changes. ▪ Plan includes coordinated release of revised NIPAs and 2007 Benchmark Input-Output Accounts, which will be fully integrated. ▪ Discussion of major proposed conceptual changes 2

Why conduct a comprehensive revision? ▪ Incorporates benchmark source data  2007 Benchmark Input-Output Accounts and Economic Census  Other major source data  Flexible annual revision in 2011 allowed us to incorporate some data from economic census ▪ Statistical revisions to GDP, GDI, statistical discrepancy ▪ Conceptual revisions  Reflect updated international guidelines: System of National Accounts 2008 (SNA). ▪ Improvements to tables and presentation of data 3

4 Proposed major conceptual changes ▪ Capitalization of research and development (R&D) ▪ Capitalization of entertainment, literary, and artistic originals ▪ Accrual measures for defined-benefit pension plans ▪ Improved measures of banking services ▪ New approach for measuring the costs of ownership transfer

5 Capitalizing R&D ▪ R&D activities create intellectual property products that have the characteristics of fixed assets:  Ownership rights  Long-lasting  Used in production process ▪ BEA published first R&D satellite account in 1994 ▪ After hiatus, work on R&D satellite account resumed in mid 2000s  Satellite account published in 2006, 2007 and 2010 ▪ In 2013, R&D will be capitalized in the core national and industry accounts

6 From R&D expenditures to GDP impacts ▪ Identify R&D investment  Sum R&D input costs  Remove double-counting  Include depreciation of other fixed assets used to produce R&D  Assign investment to owning sector  Deflate nominal investment ▪ Estimate R&D capital stocks by owner  Create capital stocks with perpetual inventory method ▪ GDP impacts  Private business sector GDP increases by new investment  Government and private nonprofit sector GDP increases by consumption of fixed capital on the stock of R&D capital

Summary of impacts: GDP Impacts (billions of dollars) Total GDP (as published in the NIPAs)14,028.7 Plus: Business own-account and purchased R&D investment269.6 Less: Software overlap adjustment-23.6 Plus: CFC on government and nonprofit R&D assets103.1 Total GDP, with R&D as investment14,377.8 Impact on GDP of capitalizing R&D349.1

R&D implementation plans ▪ Prices of R&D output are unobserved; output is heterogeneous; most is produced on own-account  Input-cost price indexes  Adjustments for productivity ▪ Economic depreciation measures the value of the capital used up in production  Industry-specific depreciation rates for business R&D  Government and nonprofit depreciation rates based on the business R&D model or on research about the production cycle for certain Federal defense and nondefense assets ▪ Work underway to develop quarterly indicators 8

9 Entertainment, literary, and artistic originals ▪ Original films, sound recordings, manuscripts, etc., that can be used for the production and sale of copies ▪ SNA recommends that they be capitalized ▪ Estimates for several types, including:  Motion pictures  Television programs  Music compositions and recordings  Books ▪ GDP impact for 2007—about $70 billion, or 0.5 percent ▪ June 2011 Survey article

Intellectual Property Products ▪ Proposed new presentation of NIPA private fixed investment tables: ▪ Nonresidential fixed investment  Structures  Equipment (no longer including software)  Intellectual property products  Software (currently included with equipment)  Research and development  Entertainment, literary, and artistic originals 10

11 Defined-benefit pension plans ▪ Current NIPA treatment treats employer contributions as compensation (cash based) ▪ Problems with current treatment:  Underfunded and unfunded pensions  Volatility of contributions  Disconnect with economic principles ▪ Proposed measure is accrual based ▪ Marshall Reinsdorf will present detailed discussion of proposal

12 Banking services ▪ For financial services furnished without payment by commercial banks, expected credit losses will be excluded from borrower services ▪ Avoid spurious volatility in splitting total financial services without payment between depositor and borrower services ▪ Future work: Extend the reference rate approach beyond commercial banks to thrifts

Effect of smoothing and default adjustment on borrower services 13

14 Costs of ownership transfer ▪ Real estate brokers’ commissions on structures are currently classified as fixed investment ▪ The revised SNA clarifies the scope and measurement of ownership transfer costs:  Provides a more consistent accounting of how these costs should be reflected in measures of capital stock  Depreciate costs of acquiring an asset over the period the asset is expected to be held by the purchaser (rather than over the whole life of the asset)

Before the release ▪ Additional information will be provided  “Preview” articles in Survey on the conceptual and methodological changes  Information posted on Web site  Meetings with data users ▪ Questions/comments/feedback? 15