New Framework to Measure Economic Well-Being Considers New and Free Goods and Services; Addition of Digital Goods Boosts Growth
Welfare measurement is among the most fundamental questions in economics. Policymakers and others use gross domestic product (GDP) as a proxy for welfare, but this application does not reflect the benefits of introducing new and free goods and services, such as digital goods, and may result in misunderstanding the economy.
In a new study, researchers developed a framework to measure the welfare contributions of new and free goods and services and quantify their benefits. By applying the framework to several examples (e.g., Facebook, Smartphone cameras), the study found that these goods and services significantly increase welfare.
The study was conducted by researchers at Carnegie Mellon University, Stanford University, the University of British Columbia, UNSW Sydney, and the Copenhagen Business School. It is published in American Economic Journal: Macroeconomics.
“Our framework provides a way to understand the benefits from new and digital goods,” explains Avinash Collis, assistant professor of management science and economics at Carnegie Mellon’s Heinz College, who led the study. “Our focus is on consumption of digital technologies by households and associated welfare gains, rather than production, which is properly the focus for conventional GDP metrics.”
New goods appear rapidly, and digital goods (e.g., information and entertainment services) are increasingly available at zero price, reflecting their low marginal costs of replication and distribution. Even when free goods have an implicit price, this price is not usually observed and measured. Thus, the benefits from the positive quantities of these digital goods that are consumed are underreported in the conventional national accounts even if they create considerable consumption value for consumers.
Relatedly, assessing the welfare contributions of new goods is challenging since there is no observed price for the period before they appear. Despite the increasing relevance of new and free goods, their value to consumers is not properly reflected in standard statistical agency reports for GDP or derivative metrics like productivity, which are typically defined in terms of GDP.
In this study, researchers developed a new metric, GDP-B, to capture the benefits associated with new and free goods and services, thus complementing GDP. To demonstrate the application of the framework, the study estimated the potential impact on welfare growth of Facebook and other popular digital apps, as well as improvements in Smartphones (especially cameras) from 2004 to 2017, based on an experiment that used a representative sample of the U.S. Internet population.
Incorporating Facebook into GDP-B added 0.05 to 0.11 percentage points per year from 2004, and additions to GDP-B generated by other digital goods were also estimated as significant. In addition, the study’s experiment with Smartphone cameras suggests that this technology would add 0.63 percentage points per year to GDP-B. These high valuations for digital goods have not been recognized by conventional approaches, say the authors.
The framework used in this study is applicable not only to digital goods but also to conventional goods (e.g., breakfast cereal, jet travel), some of which have significantly higher or lower contributions to welfare than might be inferred from expenditures alone. The framework might also be expanded to non-market goods (e.g., government mandates, COVID-19 tests), ultimately providing a more comprehensive and meaningful measure of welfare changes.
“We used our framework to explore more thoroughly the impacts of new and free goods and services on welfare,” says Erik Brynjolfsson, professor and director of the Digital Economy Lab at Stanford University’s Institute for Human-Centered Artificial Intelligence, who coauthored the study. “In doing so, we inform the debate regarding the potential of the digital economy to generate productivity, economic growth, and welfare gains, and the paradox implicit in the gap between the rise of the digital economy and stagnating productivity as conventionally measured.”
The study was funded by the Stanford Digital Economy Lab, the MIT Initiative on the Digital Economy, the Social Sciences and Humanities Research Council of Canada, and the Australian Research Council.
In a new study, researchers developed a framework to measure the welfare contributions of new and free goods and services and quantify their benefits. By applying the framework to several examples (e.g., Facebook, Smartphone cameras), the study found that these goods and services significantly increase welfare.
The study was conducted by researchers at Carnegie Mellon University, Stanford University, the University of British Columbia, UNSW Sydney, and the Copenhagen Business School. It is published in American Economic Journal: Macroeconomics.
“Our framework provides a way to understand the benefits from new and digital goods,” explains Avinash Collis, assistant professor of management science and economics at Carnegie Mellon’s Heinz College, who led the study. “Our focus is on consumption of digital technologies by households and associated welfare gains, rather than production, which is properly the focus for conventional GDP metrics.”
New goods appear rapidly, and digital goods (e.g., information and entertainment services) are increasingly available at zero price, reflecting their low marginal costs of replication and distribution. Even when free goods have an implicit price, this price is not usually observed and measured. Thus, the benefits from the positive quantities of these digital goods that are consumed are underreported in the conventional national accounts even if they create considerable consumption value for consumers.
Relatedly, assessing the welfare contributions of new goods is challenging since there is no observed price for the period before they appear. Despite the increasing relevance of new and free goods, their value to consumers is not properly reflected in standard statistical agency reports for GDP or derivative metrics like productivity, which are typically defined in terms of GDP.
In this study, researchers developed a new metric, GDP-B, to capture the benefits associated with new and free goods and services, thus complementing GDP. To demonstrate the application of the framework, the study estimated the potential impact on welfare growth of Facebook and other popular digital apps, as well as improvements in Smartphones (especially cameras) from 2004 to 2017, based on an experiment that used a representative sample of the U.S. Internet population.
Incorporating Facebook into GDP-B added 0.05 to 0.11 percentage points per year from 2004, and additions to GDP-B generated by other digital goods were also estimated as significant. In addition, the study’s experiment with Smartphone cameras suggests that this technology would add 0.63 percentage points per year to GDP-B. These high valuations for digital goods have not been recognized by conventional approaches, say the authors.
The framework used in this study is applicable not only to digital goods but also to conventional goods (e.g., breakfast cereal, jet travel), some of which have significantly higher or lower contributions to welfare than might be inferred from expenditures alone. The framework might also be expanded to non-market goods (e.g., government mandates, COVID-19 tests), ultimately providing a more comprehensive and meaningful measure of welfare changes.
“We used our framework to explore more thoroughly the impacts of new and free goods and services on welfare,” says Erik Brynjolfsson, professor and director of the Digital Economy Lab at Stanford University’s Institute for Human-Centered Artificial Intelligence, who coauthored the study. “In doing so, we inform the debate regarding the potential of the digital economy to generate productivity, economic growth, and welfare gains, and the paradox implicit in the gap between the rise of the digital economy and stagnating productivity as conventionally measured.”
The study was funded by the Stanford Digital Economy Lab, the MIT Initiative on the Digital Economy, the Social Sciences and Humanities Research Council of Canada, and the Australian Research Council.
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Summarized from an article in American Economic Journal: Economics, GDP-B: Accounting for the Value of New and Free Goods, by Brynjolfsson, B (Stanford University), Collis, A (Carnegie Mellon University), Diewert, WE (University of British Columbia and UNSW Sydney), Eggers, F (Copenhagen Business School), and Fox, KJ (UNSW Sydney). Copyright 2024. All rights reserved.
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