With R&D Recognized as Investment in GDP Statistics, U.S. R&D-to-GDP Ratio Falls

Because of recent changes in the methodologies used by the U.S. Bureau of Economic Analysis (BEA), research and development is now recognized as investment in statistics on U.S. gross domestic product (GDP).  As a result, from 1929 to 2012, the average annual growth rate of GDP is 0.1 percentage point higher than in the previously published estimates. This revised GDP quantity slightly decreases the R&D-to-GDP ratio often times used as a proxy for a nation’s R&D intensity, according to a fact sheet by researchers at the National Science Foundation.

For many years, the BEA treated private sector research and development expenses (R&D) as an intermediate cost of production and removed these expenses when they calculated the value-adding activities that define GDP. At the same time, government R&D expenditures were included in the consumption expenditures component of GDP, but not separately identified.  The new BEA treatment, which considers R&D as investment in all sectors of the economy, estimates the value of R&D, not its current costs.  

Estimates of R&D investment have two components: own-account R&D, which is funded and performed internally, and purchased R&D. The estimation of own-account R&D comes from the sum of the costs used to produce R&D plus the depreciation for the physical fixed investments used to produce it, while the value of purchased R&D includes profits, or the seller’s revenue minus costs.  Because the value of software R&D is already included in software investment calculations by the BEA, it is the only sector where BEA estimates of R&D are excluded.

Since the changes in the methodology increased the quantity of GDP, yet NSF calculations of R&D expenditures remained unchanged, the ratio of RD-to-GDP is now considerably lower than previously reported by the NSF in its National Patterns of R&D Resources series. In other words, the size of the denominator increased while the numerator remained the same. From the 2002 to 2012 time period, for example, the R&D-to-GDP ratio was, on average, 0.09 percentage points lower with the revised GDP methodology.

From a rankings perspective, this ratio change dropped the United States from sixth to eighth for R&D intensity in 2012, according to the United Nations Educational, Scientific, and Cultural Organization (UNESCO) Institute for Statistics.