Blog Post

Blogs review: GDP, welfare and the rise of data-driven activities

What’s at stake: The worry today is not that investment in technology might not be as productive as we thought (the so-called computer paradox), but the fact that the economic value of the fast growing consumption and production of online data may not be adequately captured in official statistics. While GDP has always been an imperfect metric for welfare, a number of authors have wondered if this issue has not become worse in the information age.

By: and Date: February 15, 2014 European Macroeconomics & Governance Tags & Topics

What’s at stake: The worry today is not that investment in technology might not be as productive as we thought (the so-called computer paradox), but the fact that the economic value of the fast growing consumption and production of online data may not be adequately captured in official statistics. While GDP has always been an imperfect metric for welfare, a number of authors have wondered if this issue has not become worse in the information age.

Cartoon by Manu

The GDP puzzle

Erik Brynjolfsson and Adam Saunders write that we see the influence of the information age everywhere, except in the GDP statistics. More people than ever are using Wikipedia, Facebook, Craigslist, Pandora, Hulu and Google. Thousands of new information goods and services are introduced each year. Yet, according to the official GDP statistics, the information sector (software, publishing, motion picture and sound recording, broadcasting, telecom, and information and data processing services) is about the same share of the economy as it was 25 years ago — about 4%.

Erik Brynjolfsson and Adam Saunders write that the answer isn’t about quantity, it’s about price. GDP is a measure of the current market value of production. So if you listen to a free song, there’s virtually no contribution to GDP (perhaps a few fractions of a cent for the electricity you use). Brynjolsson notes that you could have an enormous of explosion of bits or articles or whatever else. If they’re priced at zero, the statisticians in Washington do the math and, lo and behold, it comes out as a big fat zero contribution for our GDP.

Free goods, GDP and consumer surplus

Since most of the on-going discussions about free online services and data revolve around their ‘unrecorded’ value in GDP statistics, it is tempting to think that everything would be fine if only this ‘value’ could be included ‘back into’ GDP. But it misses the distinction between GDP and economic value. Since its invention as part of the development of national income and product accounts by the US and UK treasuries in the 1930s and 1940s GDP was and remains primarily designed to capture, in the words of Robert Costanza and co-authors, only monetary transactions related to the production of goods and services”.

Greg Ip writes that typically economists determine non-monetary benefits by trying to calculate "consumer surplus": the difference between what a consumer pays and what they would be willing to pay. As stressed by Shane Greenstein, even for a good that has a price, it is hard to estimate consumer surplus. This issue is as old as newspapers and libraries as the benefits a reader obtained from a local newspaper probably exceeded the $0.25 he or she paid. Greg Ip notes that when so many Internet services such as search and social media are free and have no precise market based analog, the task is made even harder.

Modeled Behavior illustrates how two goods with the same contribution to GDP as PxQ and the exact same supply curves may yield highly different surpluses depending on the steepness of their demand curves.

Source: Modeled Behavior

Hal Varian writes that economists commonly use two measures to assign monetary value to some good or service: the "compensating variation" and the "equivalent variation". The compensating variation asks how much money we would have to give a person to make up for taking the good away from them while the equivalent variation asks how much money someone would give up to acquire the good in question. The term "consumer surplus" refers to an approximation to these theoretically ideal measures.

Free goods in the information age

If the problem of measuring economic surplus problem of free or cheap goods is as old old as newspapers, libraries, friendship and home production why is the issue coming back with such force with the advent of the information age?

Erik Brynjolfsson and Adam Saunders write that the irony is that we know less about the sources of value in the economy that we did 25 years ago. GDP is a more accurate metric of value in industrial-age industries like steel or automobiles than in information industries.

Tyler Cowen also wondered a couple of years ago if GDP was not going to end up telling us less and less about broader efforts to improve human well-being. Felix Salmon asked this question to Tyler: are you saying that the web has increased the amount of fun that people can have without spending money, or at least has increased the nation’s aggregate fun-to-spending ratio? Are you saying that the correlation between aggregate fun and GDP used to be stronger than it is now, thanks to the advent of the web? Tyler Cowen recently argued that Internet might indeed have higher average consumer surplus. A recent paper by Michael Mandel suggests that it may have been especially true in the recent period with the rise of data-driven economic activities.

Internet consumer surplus: some estimates

The Economist reports the results of a study that asked 3,360 consumers in six countries what they would pay for 16 Internet services that are now largely financed by ads. On average, households would pay €38 ($50) a month each for services they now get free. After subtracting the costs associated with intrusive ads and forgone privacy, McKinsey reckoned free ad-supported Internet services generated €32 billion of consumer surplus in America and €69 billion in Europe.

Hal Varian writes that one way to measure the value of online search would be to measure how much time it saves us compared to methods we used in the bad old days before Google. Based on a random sample of Google queries, researchers found that answering them using the library took about 22 minutes while answering them using Google took 7 minutes. Overall, Google saved 15 minutes of time. (This calculation ignores the cost of actually going to the library, which in some cases was quite substantial. The UM authors also looked at questions posed to reference librarians as well and got a similar estimate of time saved.) In dollar terms, it corresponds to $500 per adult worker per year.

Shane Greenstein of Northwestern University’s Kellogg School of Management looked at broadband demand to estimate the consumer surplus from using Internet. Looking at broadband demand, which does have a price, helped capture the demand for all the gains a user would get from using a faster form of Internet access.

The Economist discusses another technique recently employed by Erik Brynjolfsson and Joo Hee Oh.  Between 2002 and 2011, the amount of leisure time Americans spent on the Internet rose from 3 to 5.8 hours per week. The authors conclude that in so far as consumers must have valued their time on the internet more than the alternatives, this increase must reflect a growing consumer surplus from the internet, which they value at $564 billion in 2011, or $2,600 per user.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Macroeconomics in the crossfire (again)

What’s at stake: After a first go at macroeconomics and its flaws a year ago, Paul Romer kicked off the debate again with a recent essay on how macroeconomics has gone backwards. The way that this debate, along with the debate of the role of economics in general, feeds into today's election woes, has also attracted attention in the blogosphere.

By: Pia Hüttl Topic: European Macroeconomics & Governance Date: December 5, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The Italian referendum

What’s at stake: on 4 December, Italy will hold a referendum on a proposed constitutional reform approved by Parliament in April. The reform, which was designed in tandem with a new electoral law, aims to overcome Italy’s “perfect bicameralism” by changing the structure and role of the Italian Senate. It also changes the distribution of competences between the state and regions. After the shocks of Brexit and the US election, polls are now drifting towards a defeat of the government’s position in Italy.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 28, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Trumpocalypse now: first reactions

What’s at stake: this question should probably be re-formulated as “what’s NOT at stake?” On Tuesday 8 November, the US elected Donald Trump as its next President. Several aspects of Trump’s political and economic agenda appear extreme (we have previously focused on his stance on trade). After the initial shock, we review economists’ opinions on what has happened and what may happen. We will be coming back to this topic regularly.

By: Silvia Merler Topic: Global Economics & Governance Date: November 21, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Brexit and the law

What’s at stake: last week, the UK High Court ruled that the triggering of Article 50 - and therefore the Brexit process - should involve the UK Parliament. The Government will appeal the decision but this has created a new wave of uncertainty about the timing of Brexit, and on what this involvement can mean in practice. We review the different opinions.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 14, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Monetary policy at the time of elections

What’s at stake: At this week’s meeting, the Federal Reserve left interest rates unchanged. While this was largely expected, the economic blogosphere has been discussing whether and to what extent this is linked to the election, and what can be expected for the future.

By: Silvia Merler Topic: Global Economics & Governance Date: November 7, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Should we rethink fiscal policy?

What’s at stake: there has been quite some discussion recently on whether we should rethink the framework of fiscal policy in order to make it more appropriate and effective in a world where demand seems to be chronically anemic, inflation is low and the interest rates are likely to stay close to zero (if not negative) for a long time. According to some of the authors, in the Eurozone these concerns are particularly pressing.

By: Silvia Merler Topic: Global Economics & Governance Date: October 24, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Brexit, the pound and the UK current account

What’s at stake: UK PM Theresa May announced the intention to trigger article 50 by March 2017, the Pound Sterling crashed, and a dispute among Tesco and Unilever has resulted in Marmite shortage. Brexit means Brexit, and it continues to be highly discussed. It would be impossible to summarise all the economic blogosphere on Brexit. Our aim is to periodically update our readers on selected important aspects of what promises to be a long-lived topic of discussion. This time we are looking at economists’ view on the Pound crash and the UK current account.

By: Silvia Merler Date: October 17, 2016
Read article More by this author

Blog Post

Silvia Merler

The Deutsche Bank Frenzy and what it says about European banks

What’s at stake: The IMF recently published its Fall Global Financial Stability Report, which points to a decrease in short-term risk but building of medium-term ones. At the same time, European market has been nervous last week on the news that Deutsche Bank (Germany’s biggest bank) has been demanded USD14bn by the US Department of Justice to settle allegations that the bank mis-sold mortgage-backed securities before the financial crisis. While reports point to a possible USD5.4bn settlement, this turmoil raises a question of whether the European financial system is still weak, eight years since the crisis. We try to summarize the reactions in the blogosphere.

By: Silvia Merler Topic: Finance & Financial Regulation, Global Economics & Governance Date: October 10, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Trumping Trade

What’s at stake: Trade is a central topic in the US presidential campaign, with both candidates expressing some degree of criticism about past trade policy. But while Hillary Clinton’s position could be described as a cautious scepticism, Donald Trump’s trade plans are more openly protectionist. His proposals include high tariffs on imports, renegotiating trade agreements and possibly US withdrawal from the WTO. After the first presidential debate, we review economists’ reactions and their assessment of Trumps trade policies.

By: Silvia Merler Topic: Global Economics & Governance Date: October 3, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Big in Japan

What’s at stake: This week saw two important Central Banks’ meetings, whose outcomes could hardly be more different. While the U.S. Federal Reserve left interest rates unchanged, the Bank of Japan introduced a big shift in its easing framework. BOJ committed itself to overshoot its inflation target of 2 percent, and introduced a targeting of the yield on ten-year Japanese government debt, initially at about zero percent. We review the economic blogosphere reaction to this latest monetary policy action.

By: Silvia Merler Topic: Global Economics & Governance Date: September 26, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The US infrastructure investment debate

What’s at stake: Infrastructure investment has been and will continue to be a prominent campaign theme in the run up to the US elections. Both Hillary Clinton and Donald Trump have promised significant public investment in infrastructure. For some time, the discussion has revolved around the opportunities and costs of increased government infrastructure spending.

By: Silvia Merler Topic: Global Economics & Governance Date: September 19, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The Apple of Discord

What’s at stake: On August 30th, following the results of an in-depth state aid investigation started in 2014, the European Commission concluded that Ireland granted undue tax benefits of up to €13 billion to Apple. The decision is based on state aid grounds: the Commission argues that two tax rulings issued by Ireland effectively granted Apple preferential treatment, which amounted to state aid. The Commission ordered Ireland to recover up to €13 billion (plus interest) from Apple, but the decision is controversial and opinion differ as to the effects it will have. We summarize reactions.

By: Silvia Merler Topic: Innovation & Competition Policy Date: September 12, 2016
Load more posts