I have been hearing this question more and more lately, even in China. Overall I think it has gone from an underrated effect to an overrated effect. Tim Worstall offers an introduction to this debate.

Let’s not forget that you do in fact pay for Facebook access, indirectly, when you pay for your cable connection, your iPad, and your smart phone. including the monthly bill, all of which are part of measured gdp. The more value Facebook brings you, the more you would be willing to pay for these goods and services. The same is true for Google and the like. So Facebook and other internet services are part of a bundled package of market value, but that is very different from claiming they are not measured in gdp at all.

There is of course consumer surplus from the internet and Facebook, just as there is from Dunkin’ Donuts. Might that consumer surplus be especially high? Well, we don’t know, but don’t assume it will be. I did some casual googling, and found a number of estimates suggesting that smart phone demand is relatively price elastic, with the iPhone a possible exception to that regularity. That implies consumer surplus isn’t especially high, because many people aren’t willing to buy at the higher price. I thus think Brad DeLong is far too optimistic in his estimates of ratio consumer surplus to market price.

You also could look at the literature on the demand for cable internet services. The results are mixed, but again I don’t see a strong case for a disproportionately high consumer surplus from these services, if anything the contrary.

Now maybe these estimates are wrong, or looking at the wrong margin in some way, but the fact that I hear them mentioned so rarely gives me pause. Cowen’s Third Law.

There is also advertising over the internet. Let’s say Facebook is a profit maximizer. Insofar as Facebook is of value to consumers, the company can get away with putting a lot of ads on the site. These will spur additional market purchases, and so part of the value of the site is again captured in gdp. Obviously some of these ad effects are simply expenditure-switching, and so there is no full capture of value, but still Facebook shows up in gdp statistics in yet another way.

Here are some previous posts on this topic.