Magazine Fall 2009

What the GDP Gets Wrong (Why Managers Should Care)

The irony: We know less about the sources of value in the economy than we did 25 years ago.

Erik Brynjolfsson and Adam Saunders Reading Time: 4 min 

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Image courtesy of Flickr user Fey Ilyas

Image courtesy of Flickr user Fey Ilyas

We see the influence of the information age everywhere, except in the GDP statistics.1 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%. How is this possible? Don’t we have access to more information than ever before?

The answer isn’t about quantity, it’s about price. The bits that comprise today’s information goods are supplanting the atoms that formed yesterday’s encyclopedias, movie theaters, music CDs and newspapers. Online information may be updated every minute of the day and accessible almost anywhere in the world, but its price is usually radically lower than that of its physical counterpart, if there even is a price.

The recording industry embodies this trend. In the past few years, consumers have dramatically shifted their music purchases from physical media such as CDs to online sources such as iTunes. (See “Going Digital.”) Consumers have changed their purchasing habits by buying fewer physical units (CDs, cassettes or vinyl records). Sales declined from more than 800 million units in 2004 to just 400 million units in 2008. Contrast that with the vast increase in paid downloads of digital songs. In 2008, more than 1 billion digital single songs were purchased in the United States, as well as more than 50 million digital albums. An even larger number of songs were downloaded illegally, though that’s not reflected in our charts.

Going Digital
Consumers Are Buying More Music…

View Exhibit

Yet this increase in the number of units has not translated into more revenue — in fact, quite the opposite has occurred. Combined revenue from the sale of songs for the record companies went from more than $12.3 billion in 2004 to $7.4 billion in 2008 — a whopping 40% decline. Even if we add digital sales made on mobile phones (which would include ringtones), subscriptions from services such as Napster Inc. or Real Network Inc.

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About the Authors

Erik Brynjolfsson is the director of the MIT Center for Digital Business and a professor at the MIT Sloan School of Management. Adam Saunders is a lecturer at the Wharton School, University of Pennsylvania. Their new book, Wired for Innovation: How Information Technology Is Reshaping the Economy, is available from MIT Press.

References

1. Apologies to Bob Solow.

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Comments (10)
CreateCo
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[…] which are given away for free. The piece is a nice summary of recent research by economists like Brynjolfsson and Mandel who attempt to augment existing national income accounts with better measurements of the […]
Vlad
Also, I would like to attempt to frame the question of how to possibly measure unaccounted added value of free technology: could it be that in the current environment of near-zero inflation and today's unemployment numbers suggesting employment holding still, that trillions of *dollars emitted by Feds through latest rounds of quantitative easing are roughly equal the value of free goods and services unaccounted for by GDP numbers and other stats*? If not, why?
Vlad
I give away free enterprise software that has about 1 million installations worldwide, mostly as a component in industrial, medical and military equipment monitoring systems. Assuming it provides only $5 of value in its lifetime, it's a $5,000,000 of off-the-books value that no statistics will ever see, and very little of which I will receive as a compensation ($160 in 2012 :-)). This also puts huge deflationary pressure on the the dollar, as essentially I took a few million dollar pay cut. No wonder that 2 trillion dollars of Feds' quantitative easing didn't abate the deflationary trend. We simply are loosing money as a valid measure of humans' contribution, hence GDP numbers getting less and less useful.
Elizabeth Villagómez
Can't pay to read....I hope you did take the PPP discussion on board in the article as well as the basic economic analysis of product cycles..
Stuart Ritchie
The other thing to consider Trevor, is that you can also buy a video camera for $150 that does far more than a $1200 camera used to. So price has come down as well as getting more bang for your buck.

Stuart
trev789
The inability to account for improvements through technology seems to me to be a general weakness of GNP as a measure of prosperity. It isn't specific to the information sector. E.g. 25 years ago you could buy a video camera for $1200. You can by one now for the same price but it does a hell of a lot more than the ones you could buy back in the mid-80s. This must be the same across other industries - e.g. construction technology must have made it cheaper to get more 'house' for your buck.

Technology increases our prosperity without changing the amount we pay for it. So GDP doesn't measure the actual increase in prosperity. Which is a shame because growth in GDP is generally taken that way, and is chased by all the major political parties.
Those are my thoughts. Anyone else?
Trevor Thomson