How is software treated in Gross Domestic Product calculations?

Question

Is there a concise explanation of how software is treated in GDP calculations? It seems a bit complicated. I can only figure out part of the story:

• For consumer purchases, I think all software spending shows up as final consumption, whether it's purchased shrinkwrapped software or whether it's access to a software-as-a-service (SaaS) website like TurboTax.

• Business purchases confuse me more. In the US anyway, software is now counted as part of Private Fixed Investment. But I don't fully understand all the jargon, e.g. about "originals"/"copies"/"own-account"/etc.. Some of the main cases that need to be addressed seem to be: 1) software written purely for internal use, 2) software written by one company and sold to others, and 3) software-as-a-service (SaaS) tools like Salesforce.

Another wrinkle is open source software, or other types of software that are given away at no cost. Does that always count as $0 in GDP? Does the answer change depending on whether the open source project has a corporate sponsor or two that pay for much of the development work?

And what about updates to software -- Major releases? Minor releases? Bug fixes?

Answer 1

The National Income and Product Accounts (NIPA) are used to calculate GDP. The Bureau of Economic Analysis (BEA) prepares methodology papers discussing how they calculate various contributions to the NIPA. They happen to have one on software for business software and this paper should be of use:

This section describes the methodologies used to prepare (1) annual estimates of business and government purchases of software (prepackaged and custom), (2) annual estimates of own-account production of software, and (3) price indexes that are needed to prepare the real estimates of capitalized software. The description is limited to the period beginning with 1992.

Estimation of Software in the U.S. National Accounts: New Developments (Moylan (2003))

The methodology for household consumption of software is in the personal consumption expenditures document.

Open-source software is a non-market transaction and not in GDP directly though it may boost the value of goods (like computers) and services (like consulting):

But by the 1950s, critics of GDP as a metric were emerging, critics such as the economist Moses Abramovitz. Indeed, Kuznets himself had written that ‘the welfare of a nation can scarcely he inferred from a measure of national income. One criticism of the use of GDP focuses on the effectiveness of GDP as an economic measure per se. As a number of critics have pointed out, GDP can he considered flawed. It does not, for example, measure volunteer or non-market transactions. These types of transactions are both numerous and wide ranging and can cover anything from the care of sick relatives to the creation of open-source software. Furthermore, GDP is either a sum total or per capita measure. As such, it does not reveal the distributions of wealth behind the per capita figure. Indeed, the GOP per capita figures may hide important and potentially divisive wealth inequalities within a country.

Government for a new age: The transformation agenda by Khoury and Abouchakra (p. 190)