GDP measurements totally miss digital economy

The economic value in free digital goods -- regarded as a big 'zero' in traditional GDP measurements -- may be up to $300 billion a year to the U.S. economy alone.
Written by Joe McKendrick, Contributing Writer on

For decades, the measure of a country or region's economic vitality has been the output of gross domestic product, or GDP.  Lately, however, economists and other informed observers have been questioning the accuracy of GDP -- as it tends to be based on industrial measures, and misses the ever-expanding mass of digital activity.

Photo credit: Joe McKendrick

In a new post, Dr. Irving Wladawsky-Berger, for one, documents a mountain of evidence that GDP measurements are missing the mark in what is perhaps the fastest-growing sector of the economy. "GDP is essentially a measure of production," says the former vice president of IBM, chairman emeritus of the IBM Academy of Technology, and visiting lecturer at the Massachusetts Institute of Technology. "While suitable when economies were dominated by the production of physical goods, GDP does not adequately capture the growing share of services and the production of increasingly complex solutions that characterize advanced economies. Nor does it reflect important economic activity beyond production, such as income, consumption and living standards."

GDP fails to capture "the explosive amount of free information goods available over the Internet, including Wikipedia articles, Google maps, Linux open source software and YouTube videos," Wladawsky-Berger says.

He points to a post by economists Erik Brynjolfsson and Adam Saunders in MIT’s Sloan Review, which bluntly states: “We know less about the sources of value in the economy than we did 25 years ago.... 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?”

Potentially, the economic value in free digital goods -- regarded as a big "zero" in traditional GDP measurements -- is actually worth quite a bit to the economy in terms of advertising (the consumer "attention" factor) and the enhanced innovation delivered across various business sectors. Brynjolfsson pegs this value at about $300 billion a year to the U.S. economy alone.

Wladawsky-Berger, who helped lead IBM's shift to Internet and open-source computing, cites the company's example of embracing what were seen as zero-revenue offerings to build significant new lines of business. "While much of the value was created by the small teams focused on developing the new initiatives, the bulk of the value was captured by the existing IBM business units.  In the early years of the initiatives, they saw incremental revenues from supporting the new capabilities with their existing offerings.  And, over time, they came up with all kinds of new products and services based on the growing marketplace presence of the Internet and Linux."

The digital economy -- including cloud, social and mobile -- is also providing cheap and ubiquitous platforms for launching a wide range of innovation and economic disruption. Again, numbers we don't see in the quarterly GDP reports.

(IBM, mentioned in this article, is a sponsor of CBSi SmartPlanet.)

This post was originally published on Smartplanet.com

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