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
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 doi