NCPA - National Center for Policy Analysis

Software's Economic Importance

May 27, 1998

Surprisingly little is known about the role of software in our economy. Computers and related hardware now account for 10 percent of the nation's nonresidential fixed investment, but no similar data exist for software. The reason is that the Commerce Department, which calculates the gross domestic product (GDP), treats software as an intermediate good and excludes it from GDP.

GDP is calculated by adding together the dollar value of all domestically produced final goods and services -- those that are either consumed or added to the nation's capital stock. Intermediate goods, by contrast, are used up in the production process, and their value is assumed to be incorporated into the price of final goods.

However, in most cases computer software is in fact an investment; therefore, it should be added to GDP as part of gross private domestic investment. In a recent paper, "Changing the Treatment of Software Expenditures in the National Accounts," the Congressional Budget Office calculated the impact on GDP of treating software as an investment, rather than an intermediate good.

  • In 1995, measured GDP would have been $47 billion larger, 0.7 percent more than previously reported.
  • Investment in producers' durable equipment would have been 9 percent larger and gross private domestic investment would have been 4.5 percent higher.
  • Furthermore, because software prices have been falling, it would have raised the real (inflation-adjusted) GDP growth rate from 2 percent to 2.17 percent.

Further evidence of the importance of software to economic growth comes from the Census Bureau, which recently released data on receipts of computer-services businesses -- those that provide computer programming, data processing and related services. In 1996, receipts for such firms reached $184 billion, an increase of 18 percent over 1995.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), May 27, 1998.

 

Browse more articles on Economic Issues