Fun stuff in the BEA's working papers about the GDP measurement changes Among the factoids we came across while reading Books as Capital Assets, by Rachel Soloveichik of the BEA: 1) Book sales have tracked nominal GDP pretty closely for about sixty years: Figure 1 shows the annual sales of books for every year from 1929 to 2010. At first glance, the most striking result from Figure 1 is the steady increase in nominal sales from 1950 onwards. However, nominal GDP has also risen steadily over this time period. In fact, the share of nominal GDP devoted to book sales has remained relatively steady from 1950 to 2010. 2) Until e-readers, there had been stagnation in books printing technology for about fifty years:... The most striking result from Figure 4 is that inflation rates have not been constant over time. Between 1929 and 1959, book prices rose by only 2.1% per year - about the same as the overall economy. Between 1959 and 1989, book prices rose by 5.3% per year - 0.8% higher than overall GDP prices. Between 1989 and 2010, book prices rose by 3.7% per year - 1.5% higher than overall GDP prices. The results after 1959 are consistent with Baumol's cost disease hypothesis. According to that hypothesis, the price for goods with zero productivity growth should rise much faster than overall inflation (Towse 2003). Before 1959, printing technology improved rapidly (Genesove 1999) so book prices were able to stay low. Between 1960 and 2005, printing technology did not change much. As a result, book prices rose faster than overall inflation. In the past few years, e-readers like Kindle have started to change the book industry. The new technology might lower book prices going forward. ... 3) ... and people became interested in other stuff starting about forty years ago: The most important result from Figure 5 is that real book production rose very slowly from 1970 to 2010. Over the same time period, real GDP grew by 207%. ... Between 1929 and 1970, real book production rose at approximately the same rate as real GDP. At first glance, the stagnant book production from 1970 to 2010 seems surprising. US population grew by nearly 50% over that time period - so it might be expected that the number of authors would also grow by 50%. In fact, technology changes have dramatically changed the demand for books. Since 1970, the technology for listening to music, watching movies and television has improved dramatically. Video games did not even exist in 1970. Over the same time period, the technology for writing books, printing books and enjoying books has changed little. Some creative people may have responded to the new technologies by redirecting their energies from book writing to other forms of entertainment. Newspapers have also experienced declining real sales and stagnant readership since 1965 (Newspaper Association of America 2009). 4) Later editions of classic books don't add much to their original investment value: Figure 10 calculates the depreciation schedule for book originals. Book originals depreciate rapidly regardless of whether I track revenue or profits. When I track revenue, book originals lose 80% of their value in the first five years of life. Depreciation is slightly slower when I track profits, but original books still lose 64% of their value in the first five years of life. In the national accounts, I approximate the depreciation schedule shown in Figure 10 with a geometric depreciation rate of 12.06% per year. This geometric rate produces similar estimate of aggregate capital stock At first glance, the short lifespan for book originals suggests that almost nobody reads classic books. In fact, book copies are durable goods. Accordingly, a library might purchase a book copy soon after release, and then lend it for decades to come. Similarly, consumers who discover an old author can often buy used copies of his or her works without the author or publisher making any new money. 5) We might soon have to consider including pirated books in the national income statistics: In this analysis, I only consider the price of books sold. Therefore, I ignore free digital books like fan fiction or blogs. I also ignore pirated books like illegal Xeroxes or illegal transfers of electronic books. This definition is consistent with BEA's general practice of excluding illegal activity from the National Income statistics. At the present moment, book piracy is relatively rare in the United States, so excluding pirated books makes little difference. However, book piracy is rapidly increasing with the introduction of digital books (Rich 2009), and so the treatment of pirated books may eventually become important. 6) The prices of educational vs recreational books have diverged since 1995, and here's why: As Figure 3 shows, the BLS's PPI index does not match either of BEA's preexisting price indexes for books. Recreation book prices are nearly flat from 1995 to 2010. In contrast, educational book prices rise very fast.* The main reason for the different price trends is different inputs. Educational book authors tend to be highly skilled individuals. This group has experienced larger wage gains than the overall public. In contrast, recreational book authors are often ordinary people. Furthermore, recreational books benefited from chain book sales and internet sales driving down the average retail mark-up. Educational books are often sold directly to schools, so they had much less competition (Raff 2000). In addition, educational book prices may have been increased to compensate for used book sales. Finally, the BLS's consumer book index uses a matched model technique to calculate inflation for books. This technique has been shown to underestimate inflation in other industries (Reinsdorf, Liegey and Stewart 1996). Though the flattening of recreational book prices starting in 1995 and the special circumstances related to education books and their ongoing price rise would seem to contradict part of the second item above. The report is part of a series of working papers complementing the introduction of the BEA's new method for calculating GDP, which now includes capitalizing as investment assets the production costs of "artistic originals" - books, theatrical movies, long-lived television programs, music and miscellaneous artwork. We covered the basics here, and see also Robin Harding's excellent coverage. To capitalize these costs makes perfect sense conceptually. Books and the other categories generate future revenue streams beyond the year in which they are produced or published, and in some cases they will also lead to future output. Thus their annual addition to the capital stock should be accounted for in its entirety. But the calculation requires estimates for the revenue streams that new books will generate in future years, estimates for any future costs of generating these future revenues (reprining new editions of books, introducing audio editions etc), and an estimate for the net present values of both. And all of these require looking to patterns from the past for insight into what will happen in the future - for instance to arrive at the appropriate discount rate for the net present value calculation. What the papers by Soloveichik show is that this remains a messy and imprecise process, one that necessarily includes myriad assumptions, interpolations, and a reliance on a mishmash of public and private sector data sets. This lack of precision isn't remotely the fault of the BEA, which is a model of bureaucratic transparency and, from what we can tell, does a great job with the limited tools available. It's just a reflection of how difficult it remains to understand in real-time the short-term fluctuations, or even the medium-term evolution, of the US economy. The changes introduced in last week's comprehensive benchmarking were, despite the new logistical challenges, a welcome improvement. And there will continue to be incremental progress on making the national accounts more accurate. Perhaps one day the Big Data revolution will even come to macroeconomic data-gathering, but for now it's a very long way from N = Everything. Related links: A guide to the conceptual US GDP changes - FT Alphaville The same old US economy, seen through a different lens - Gavyn Davies