New study confirms that UK GDP calculation understates growth 2010-11-12

One of the things that the UK is best at – creating knowledge assets – is omitted from the official GDP calculations, causing underestimation of recent economic growth. Previously it seems to have been assumed that this activity grew at the same rate as the rest of GDP and that the omission would therefore not affect growth rates.  But according to the first in-depth study* of the phenomenon, they are growing significantly faster. The omission causes official GDP calculations to underestimate recent UK economic growth and encourages parliament to fund lossmaking steel-and-concrete projects that inflate a biased GDP calculation rather than boosting true economic growth.

GDP is defined as total ‘value added’ in the economy during a particular period, which includes the profit from output and the value of assets created in that period that will bring profits in future periods. ‘Intangible assets’ have been omitted because they are created by labour and it is hard to collect statistics about the labour involved.  The name itself may make them sound unimportant; ‘investment’ is something that costs you money, and ‘intangible’ sounds as if you will never know if you’ve got your money back. But these intangible asset investments are what make profits for shareholders of UK private sector companies, who look at the dividends and capital appreciation instead of the labels. Intangible asset investments amount to a hidden 10% of UK GDP according to the London University team, and they are growing faster than the rest. R&D, one of the biggest intangible investments, will be officially included in GDP from 2014 so its exclusion now is irrational.

The new London University study contains a detailed mathematical treatment confirming this blog’s earlier explanation of why UK ‘productivity’ appears to be falling.
* Can intangible investment explain the UK productivity puzzle? Peter Goodridge, Jonathan Haskel, and Gavin Wallis, February 2013.

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