GDP-B: Accounting for the Value of New and Free Goods

Innovation and Economic Growth and Competition Policy and Antitrust

Article Snapshot

Author(s)

Erik Brynjolfsson, Avinash Collis, W. Erwin Diewert, Felix Eggers and Kevin J. Fox

Source

SSRN (September, 2021)

Summary

Current methods fail to capture the value of new and free goods to national productivity. A new framework, GDP-B, better measures the benefits of these goods.

Policy Relevance

New and free goods benefit consumers. These goods should not be excluded from measurements of economic growth.

Main Points

  • Online information and entertainment goods are often available at a price of zero.
     
  • Current measurements of gross domestic product (GDP) do not accurately reflect the value of new and free goods to consumer welfare, economic growth, and productivity; accurately measuring the benefits of services such as Instagram, Snapchat, Skype, Maps, and Twitter is increasingly important.
     
  • A new metric, GDP-B, incorporates measurements of household consumption of new and free goods, allowing economists to measure the associated consumer benefits; one begins a GDP-B calculation by discovering how much consumers would ask to be paid to give up the good or service.
     
  • Free digital goods are often funded by advertising, or received in exchange for consumers' data; however, expenditures on advertising counted in GDP do not reflect the benefits of these goods to consumers, and data-for-services bartering is not included in GDP at all.
     
  • When households substitute free goods for goods with a market price, conventional measures of GDP show consumption falling; in reality, the consumption is becoming unmeasured, not falling.
     
  • Calculations of GDP-B show that Facebook adds from .05 to .11 percentage points to welfare growth per year, a significant addition.
     
    • Study participants were asked to choose between access to Facebook or a payment between 1 and 1000 dollars.
       
    • The median price to give up Facebook for one month was about $42.
       
    • The estimated contribution to consumer welfare from Facebook from 2013 to 2017 was $1,143 per user, a substantial contribution to welfare.
       
  • Calculations of GDP-B show that improved smartphone cameras added about .63 percent to national welfare growth per year.
     
    • Improved smartphones had roughly the same market price as older phones, meaning that conventionally measured GDP would fall when people stop buying digital cameras.
       
    • In reality, consumer benefits increased because of the improved cameras.
       

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