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N.M. gets richer – on paper

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New Mexico is about to get 10 percent richer.

By about $8 billion.

On paper anyway.

Thanks to a massive change the federal Bureau of Economic Analysis is making to the way it calculates gross domestic product, the reported value of goods and services produced in New Mexico between 1996 and 2007 will increase about 9 percent. Going forward, New Mexico’s gross state product should be around 10 percent more valuable.

New Mexico’s gross state product was $79.4 billion in 2011, according to the BEA.

But don’t go looking for a raise, a more generous pension or a bigger tax refund. Accounting rules are changing; the nature, size and success of New Mexico’s businesses are not.

“This doesn’t change any underlying reality, but it does question whether the way reality was perceived before was correct,” said Lee Reynis, director of the University of New Mexico Bureau of Business and Economic Research. “We may have been feeling worse than we should feel.”

Gross domestic product, or GDP, is a measure of the value of goods and services produced by an economy. When economists say the United States is the world’s largest economy, they are referring to the value of our GDP, about $15.9 trillion in 2012. A recession is defined as two consecutive quarters of declining GDP.

Historically, spending by U.S. companies on research and development has been treated as an input that gets added into the cost of producing a good or a service. Starting in July, that spending will instead be treated as an investment that consumes capital and, thus, becomes part of what the economy produces. It’s just like counting as an addition to GDP the assembly of a front-loader that gets sold to a construction company.

Federal government R&D will be counted as an investment as well because the results of research and development further the government’s role of providing services to citizens.

New Mexico’s research-intensive economy would have been valued 9.2 percent higher between 1996 and 2007 had those rules been in effect, according to a BEA analysis. The national GDP will be revalued up about 2.5 percent when R&D is treated as an investment. Louisiana, which does little research and development, will show only about a half percent increase in the output of its economy.

The changes are part of an international agreement designed to modernize how economies measure output. Australia and Canada already have implemented the changes, and the European Union will follow next year.

Accountants at the Bureau of Economic Analysis also will increase the value to the economy of investment in entertainment, literature, movies, art and audio recordings.

Meanwhile, new methods for valuing pension liabilities are likely to reveal how badly underfunded some government pension funds are, according to the BEA.

All of the changes combined are not expected to change the nation’s GDP very much in any one quarter.

New Mexico economists expect their models will have to change a little as new data inputs will be required, but changes should be invisible to consumers, businesses and taxpayers.

GDP changes should have no effect on state spending, budgeting or federal support for programs like Medicaid, said Finance and Administration Secretary Tom Clifford.

One area of research that could be changed noticeably is the productivity of New Mexico’s workforce. Productivity is measured by looking at the output of an economy against the amount of labor it took to produce it. An accounting change that raises GDP with no change in labor would instantly increase the perceived productivity of the workforce. What the value of that information might be to an economist is an interesting question, Reynis said.

Kevin G. Hall of McClatchy Newspapers contributed to this story.
— This article appeared on page A1 of the Albuquerque Journal

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