[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Wrap-Up
GDP equals consumption plus investment plus government purchases plus
exports minus imports.
Case in Point
IS SOFTWARE A FINAL GOOD OR AN
INTERMEDIATE GOOD?
Measuring output might seem straightforward when the economy produces
cars and wheat and houses, but what happens when it produces ideas? The
new technologies and the new economy they have created have forced the economists
and statisticians at the Bureau of Economic Analysis to revise the National
Income and Product Accounts. Such updates and revisions are nothing new; the
bureau is always trying to improve its estimates of economic activity. However, the
new economy has created some unique problems. One of the major changes in the
1999 Comprehensive Revision of the National Income and Product Accounts dealt
with how software is treated in GDP. Thinking about the correct way to measure
the price and quantity of software highlights the differences between final and
intermediate goods.
Prior to the new revisions, business and government expenditures on software
were treated inconsistently. Software that was bundled in a product—a suite of
office software programs such as a word processor and spreadsheet that was installed
on a computer, for instance—was treated as a final good and included as an investment.
After all, the computer is an investment good, and the value of the software
installed on it represents part of its value. If a business purchased the software separately
to install on a computer, however, it was treated as an intermediate good.
The same was true of software a business produced itself. The costs a business
incurred in producing software for its own use was treated as a business expense
similar to that for any other intermediate good.
Under the new rules, all software expenditures are treated as investment spending.
This is appropriate because software, like other investment goods, produces a
flow of services that lasts more than one year. In fact, the Bureau of Economic Activity
estimates that the average life of software is between three and five years. The effects
of these new rules will be to raise GDP by the amount of software businesses and
government agencies purchase and by the amount of software they produce for their
own use. These expenditures were not counted as part of GDP when they were
viewed as intermediate goods. By treating them as a final good, GDP is increased
by the amount spent on them.
How much difference does this make? The revisions boosted GDP during the
late 1990s by more than $100 billion per year. This is a large number, but it represents
a change in GDP of only around 1 percent.
MEASURING OUTPUT AND GROWTH ∂ 491