The Bureau of Economic Analysis (BEA) currently treats research and development (R&D) expenses as an intermediate good. That is, R&D expenses are assumed to be already included in other goods sold by firms that pay for the R&D. Beginning in 2013, however, the BEA will begin counting R&D spending as investment spending—a final good purchased by the business firms that pay for it. In effect, the BEA will begin treating R&D spending (which creates long-lasting productive knowledge) just like spending on plant and equipment (the purchase of long-lasting physical capital).
Suppose that in 2013, the BEA decides to retroactively revise nominal GDP in 2010 to reflect the new treatment of R&D, and that in 2010, U.S. businesses spent $400 billion on R&D.
a. By what percentage would private investment spending be greater in 2010 (compared to its official reported number given in the chapter)?
b. By what percentage would GDP be greater in 2010 (compared to its official reported number given in the chapter)?