How Should We Measure the Digital Economy?

How Should We Measure the Digital Economy?

How Should We Measure the Digital Economy?

Suppose we make you an offer. You give up access to Google search for one month, and we pay you $10. No? How about $100? $1,000? What would we need to pay you to forgo access to Wikipedia? Your answer can help us understand the value of the digital economy.

In 2018, Americans spent an average of 6.3 hours a day on digital media—not just Google and Wikipedia but social networks, online courses, maps, messaging, videoconferencing, music, smartphone apps, and more. Digital media consumes a large and growing share of our waking lives, but these goods and services go largely uncounted in official measures of economic activity such as GDP and productivity (which is simply GDP per hour worked). We listen to more and better music, navigate with ease, communicate with coworkers and friends in a rich variety of ways, and enjoy myriad other benefits we couldn’t have imagined 40 years ago. But if you were to look only at GDP numbers, you’d think that the digital revolution never happened. The contribution of the information sector as a share of total GDP has barely budged since the 1980s, hovering between 4% and 5% annually and reaching a high of only 5.5% in 2018. To paraphrase the economist Robert Solow, we see the digital age everywhere except in the GDP statistics.

The reason the value of digital offerings is underrepresented is that GDP is based on what people pay for goods and services. With few exceptions, if something has a price of zero, then it contributes zero to GDP. But most of us get more value from free digital goods such as Wikipedia and online maps than we did from their more expensive paper predecessors.

Policy makers use GDP data to make decisions about how to invest in everything from infrastructure and R&D to education and cyberdefense. Regulators use it to set policy that affects technology firms and other organizations. Because the benefits of digitization are dramatically underestimated, those decisions and policies are being made with a poor understanding of reality.

Effective management of the digital economy depends on our ability to accurately assess the value of free digital goods and services. That’s why we developed a new technique to measure not only how much consumers pay for digital products but how much they benefit from them. And that uncounted benefit is substantial. For example, our research with Felix Eggers, of the University of Groningen, found that Facebook alone has created more than $225 billion worth of uncounted value for consumers since 2004.

Capturing the unmeasured benefit of free goods is not a new problem: Think of earlier waves of innovation that produced free and nearly free offerings like antibiotics, radio, and television, which clearly delivered significant value to the consumer. Given the exceptionally rapid growth of digital goods and services in our economy, it’s past time to solve this problem.

What GDP Doesn’t Measure

GDP is often used as a proxy for how the economy is doing. It’s a relatively precise number that signals every quarter whether the economy is growing or shrinking. However, GDP captures only the monetary value of all final goods produced in the economy. Because it measures only how much we pay for things, not how much we benefit, consumer’s economic well-being may not be correlated with GDP. In fact, it sometimes falls when GDP goes up, and vice versa.

GDP can be a misleading proxy for economic well-being.

The good news is that economics does provide a way, at least in theory, to measure consumer well-being. That measure is called consumer surplus, which is the difference between the maximum a consumer would be willing to pay for a good or service and its price. If you would have spent as much as $100 for a shirt but paid only $40, then you have a $60 consumer surplus.

To understand why GDP can be a misleading proxy for economic well-being, consider Encyclopedia Britannica and Wikipedia. Britannica used to cost several thousand dollars, meaning its customers considered it to be worth at least that amount. Wikipedia, a free service, has far more articles, at comparable quality, than Britannica ever did. Measured by consumer spending, the industry is shrinking (the print encyclopedia went out of business in 2012 as consumers abandoned it). But measured by benefits, consumers have never been better off. Our research found that the median value that U.S. consumers place on Wikipedia is about $150 a year—but the cost is $0. That translates into roughly $42 billion in consumer surplus that isn’t reflected in the U.S. GDP.

Consumer spending—the basis for GDP—can be counted at the cash register and shows up on companies’ revenue statements. In contrast, consumer surplus cannot be directly observed, which is one reason it hasn’t been used much for measuring the economy. Fortunately, the digital revolution has created not only tough measurement challenges but also powerful new measurement tools. In our research, we use digital survey techniques to run massive online choice experiments examining the preferences of hundreds of thousands of consumers. The results allow us to estimate the consumer surplus for a great variety of goods, including free ones that are missing from GDP statistics. We start by asking participants to make choices. In some cases, we ask them to choose between various goods (for example, “Would you rather lose access to Wikipedia or to Facebook for one month?”). In others, they choose between keeping access to a digital good or giving it up in exchange for monetary compensation (“Would you give up Wikipedia for a month for $10?”). To make sure that people have revealed their true preferences, we follow up with experiments in which participants actually must give up a service before they can receive compensation.

Source: https://hbr.org/2019/11/how-should-we-measure-the-digital-economy