Even free things have a price
Who has never consulted the internet to check a user rating before booking a hotel room or finding a good restaurant? Who has never taken advantage of social networks to keep in touch with former work or school mates? Who doesn't use smartphone apps on a daily basis? All these actions, no matter how mundane they may seem, provide us with a benefit that, all together, increases the well-being of society without incurring any direct cost at all as many of the services we use to achieve such benefits come free of charge. Although we are not used to paying for them, would we be prepared to do so to continue enjoying all these conveniences? We probably would, but what is the economic activity provided by these services via such apps? Does it form part of national statistics? This article attempts to throw some light on the problems of measuring free goods and services within the national account systems.
The measurement par excellence of national accounts, namely GDP, attempts to measure the value of an economy's goods and services (see the article «On measuring and using GDP» in this Dossier). This is a relatively simple task in a traditional economy but the challenge is much greater for sectors more closely related to information technologies. Fears that the error in calculation may be large and growing arise, for example, when it is noticed that, according to the US national accounts, the information industry's relative share of GDP has remained constant at between 4% and 5% since 1990. Note that, according to International Data Corporation, the volume of information on the internet was 4.4 zettabytes (4 trillion gigabytes) in 2013, 50% up on the previous year. It is hard to believe that the sector's added value has remained stable in relative terms precisely over the period that has seen the greatest rise in information technologies.
One of the main drawbacks of GDP is that it attempts to reflect the production of goods and services via the monetary payment made when these are traded. As a result, one initial group of goods that is not reflected by GDP figures relates to activities of self-production or self-consumption, covering all the wealth produced and consumed within households. The best-known example is housework, which is only reflected in GDP when it is carried out by a third party paid for their work. A study by the Bureau of Economic Analysis estimates that, in 2010, including the value of non-market household production would have increased nominal GDP by 26%.1 Another group not included within GDP is made up of all those goods and services exchanged without any financial transaction taking place; i.e. free of charge.
Although all these inaccuracies in the calculation are well-known and have been around for some time, they have been accentuated over the last few years due to the growing involvement of new technologies in our everyday lives. In particular, new forms of self-production have appeared while the price of many goods and services has fallen dramatically, to the point where many of them are now free. As a result of this change in the model of production, GDP cannot reflect the increase in production of such goods and services. The music industry and the press are a case in point. For the specific case of the music industry, the switch from analogue to digital drastically reduced the marginal cost of this good since the digitalisation process is much cheaper and also means that music can be transmitted instantaneously and globally at a marginal cost close to zero. In addition to digital downloads there is also the possibility of streaming songs for free from platforms such as YouTube and Spotify. Such innovation has dramatically decreased the industry's earnings and the national accounts therefore suggest that production has fallen when, in actual fact, production in this industry has soared, increasing the consumption and well-being of many users.
The omission of self-production from the calculation of GDP has also become more accentuated with the emergence of the sharing economy. Shared consumption would most closely resemble what, in a world without internet, would be called self-production and exchange (or informal trade) but at a global rather than a local level, where goods, services and content are shared via digital platforms, such as Facebook, Tripadvisor and Wikipedia. In addition to activities where no money changes hands is a new economic activity in which private individuals provide goods and services in exchange for money on the internet. This new activity is increasing competition for traditional businesses and covers a wide range of sectors, from hotels to transport.
Given that the number of free goods and services is expected to go on rising in the coming years, if this error in calculating GDP is not put right it will expand and underestimate the economic performance of countries even further. Regarding this second point, Erik Brynjolfsson and Joo Hee Oh use an original, sophisticated methodology2 to measure the value of such services for the case of the United States. Specifically, they calculate how much money a consumer would need to receive to ensure their standard of living without using these free digital services would be the same as the standard of living achieved with them. Their analysis suggests that the increase in well-being thanks to the use of free digital services between 2007 and 2011 totalled 106 billion dollars per year on average, which would correspond to an increase in GDP of 0.74 pps. These figures are quite impressive and highlight the discrepancies between the value of a country's production activity and its performance, confirming just how important it is to develop alternative measures of a society's economic well-being (see the article «Does a country's GDP reflect its well-being?» in this Dossier).
In short, the rise in information and communication technologies is having a great impact on the value of the goods and services produced and traditional forms of measurement are failing to reflect people's well-being. Moreover, the bulk of the evidence suggests that, far from correcting itself, this error in calculation will increase in the coming years if nothing is done to stop it. If the economy changes, so must our ways of measuring it. The task, however, is no easy one.
Ariadna Vidal Martínez
Macroeconomics Unit, Strategic Planning and Research Department, CaixaBank
1. Bridgman, Dugan, Lal, Osborne and Villones, Accounting for Household Production in the National Accounts, Bureau of Economic Analysis Article series, 2012.
2. Erik Brynjolfsson and Joo Hee Oh, The Attention Economy: Measuring the value of free digital services on the internet, Thirty Third International Conference on Information Systems, Orlando 2012.
