Innovation Accounting

This paper looks at GDP as a market concept and, within the framework of the sources and uses of a nation's productive capacity as presented in the accounts, asks whether GDP as currently measured provides a sufficient account of the forces causing GDP to grow over time. We have found in our previous research that a broad definition of innovation investment--commonly referred to as "intangibles"--has been the largest systematic driver of economic growth in business sector output over the last 50 years, but many forms of intangibles are currently omitted from national and financial accounting practice. A complete national innovation account would necessarily involve introducing all forms (e.g., design, organizational capital, in addition to R&D) and span innovation investments by businesses, households, and government. Another important step in building an innovation account would be to make the results of innovation more apparent by introducing product quality change as an explicit component of real GDP. Finally, the paper assesses the general need to shift both the analysis of economic growth and the GDP measurement framework toward innovation and innovation accounting.