Why We Need New Measures of the U.S. Economy

How can the digital economy move forward when the GDP underestimates the value of digital goods and services?

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The Information Age has revolutionized how we shop, travel, and entertain ourselves — and yet we know little about how digitization has impacted the economy. That’s because the main gauge of economic growth, Gross Domestic Product (GDP), doesn’t capture much of the value created by “information goods.”

Current research by MIT professor Erik Brynjolfsson, Adam Saunders, and Avi Gannamaneni shows why GDP underestimates the value of digital goods and proposes methods to account for what’s missing that will be the basis for future work. GDP limitations were also discussed in the 2009 book, Wired for Innovation, and in earlier research reports.

Just how bad is the problem? According to the research team, the Bureau of Economic Analysis, which tabulates GDP, calculates that the information sector accounts for the same share of the U.S. economy as it did 30 years ago — between 4 and 5%. That hardly seems possible at a time when consumers and businesses have access to a vast and growing storehouse of information, apps, and other online tools. Better understanding of the GDP’s limitation is also useful as executives develop their own digital business capabilities and as they try to assess the value of those efforts.

How to Value Digital Goods

The researchers report that the root of the problem is prices. GDP mainly focuses on the market value of goods and services. That made sense when economists developed the measure during the Great Depression of the 1930s, when the world was mainly concerned with how many tons of steel or bushels of corn were produced. But digital products like Wikipedia, Google, Facebook, and YouTube — by their nature — are often free. So are many social marketing tools in use by businesses today. That makes them virtually invisible in terms of consumer purchases, though not in terms of value delivered.

But it’s not just a matter of adding these goods into the count: The researchers identify two theoretical issues that must be tackled in order to include digital goods and services in GDP. The first is the “production boundary” — the line between those activities that should be considered when adding up the total production of the economy and those that ought to be excluded because they’re just part of everyday life.

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Topics

Frontiers

An MIT SMR initiative exploring how technology is reshaping the practice of management.
More in this series

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