Blog Post

AEIdeas

My CD post yesterday highlighted one limitation of the measurement of economic output/well-being/growth that gets the most attention – Gross Domestic Product, which is based on national income accounting procedures that were initially developed in the late 1920s. As I pointed out (following Jon Murphy), because GDP measures “domestically produced output,” national income accounting considers the contribution of “net exports” to GDP by adding exports and subtracting imports. By that approach (starting from a point where exports = imports), if imports rise significantly relative to exports in a given year, that would typically result in: a) an increase in the nation’s trade deficit, b) a decrease in net exports, and c) a decrease in GDP. When GDP is used to assess the condition of the US economy, rising exports will typically make a positive contribution to (and increase) economic output, while rising imports will typically make a negative contribution to (and “hinder”) economic output.

In addition to the fact that rising imports “create a drag” on the economy using GDP to measure economic performance, there’s another possible limitation of traditional GDP accounting to measure economic output, well-being and performance in the Information/Digital Age — many goods and services that used to be added to GDP as market-based final sales are now available for free, almost free, or at a significant reduction in price. Some examples:

1. Newspapers. Individuals and families used to subscribe to print newspapers as their primary news source, and they now get access to almost unlimited news for free (or almost free) on the Internet.

2. Classified Ads. People and businesses used to spend a lot of money on classified ads in print newspapers for musical instruments, cars, household appliances, furniture, lawn equipment, apartments and houses for rent, employment openings, etc. What used to be market-based, paid advertising transactions have moved from print newspapers to websites like Craigslist where most listings are free.

3. Books. Families used to buy sets of Encyclopedia Britannica or other encyclopedias, dictionaries, thesauruses, writing guides (Chicago Book of Style, etc.) and other information-based books, while they now get most of that same information for free on the Internet (Wikipedia, online dictionaries, etc.).

4. Travel Resources. For traveling and vacations, families and individuals used to spend a lot of money on printed materials like road atlases, maps, city directories, and travel guides, and frequently used the services of travel agencies. Now most smartphones have free GPS apps, and we can get access to maps and directions from our computers, we can get free travel advice on the Internet, and we can make our own plane reservations without using a travel agency.

5. Music. People and bars/restaurants used to spend a lot of money on recorded music in the form of LPs, then cassette tapes, and then CDs. Now we can buy digital music usually at a lower cost, we can buy a single song from an album instead of buying the entire CD, and we can get access to lots of free (or very low cost) music from Pandora and Spotify. Personally, I used to spend about $1,000 per year on CDs, and now I spend about $100 per year on Pandora and Spotify and have access to more music than I ever did in the past.

6. Communication. Long distance phone calls used to be really expensive, and now they are basically free with a basic cell phone plan. We also now have access to free (or nearly free) forms of communication including email, Facebook, Skype, etc.

7. Cameras and Photography *NEW*: In the past, Americans spent billions of dollars every year on cameras, film and film processing. Now most of take pictures (and videos) using our smartphones, which usually come with free cameras – of acceptable quality for most of us – and we don’t buy film any more and don’t pay to have it processed (and no more waiting days or weeks for our pictures to come back).

In all of the cases above, we now get for free (or nearly free or at a much lower cost) what we used to have to pay for. Because GDP only considers market-based transactions, it fails to capture the many services that are now available for free or nearly free. Therefore, it could look like the economy is stagnating and experiencing very low rates of growth using GDP as the measure of economic performance, even though our standard of living could be improving significantly. That is, if we are using GDP to measure economic well-being, it now has a significant downward bias because it doesn’t count non-market production in a new era where the provision of non-market production is expanding greatly.

Case in Point: The chart above shows annual recorded music sales, adjusted for inflation, from 1973 to 2013, using data from the Recording Industry Association of America and available here from Minnesota Public Radio. Music sales have collapsed from almost $20 billion in 1999 to less than $6 billion in 2013, the lowest in more than 40 years. Measured by final sales of recorded music for GDP purposes, it would look like the “music well-being” of Americans was at the lowest level in at least several generations, maybe longer. And yet, most Americans (including myself) would probably agree that their access to music today is greater than ever before, and their “music well-being” is at an all-time high – in direct contradiction to what standard GDP statistics would tell us.

Bottom Line: Perhaps all of the discussions about GDP being below potential GDP and fretting about sub-par economic (GDP) growth are really simply a reflection of the fact that GDP is really no longer the best measure of economic performance, economic growth and economic well-being in the Information Age? Thanks to the advances in computer technologies, the Internet and smartphone apps, consumers are getting more and more services like GPS for free (or at a significantly reduced cost compared to the past) today and displacing services that used to get accounted for as market-based production (maps and road atlases). In past decades like the 1950s, maybe economic output measured by GDP was a pretty good measure of both economic performance and Americans’ economic well-being. In 2015, that may no longer be the case.

Here’s an update in response to some comments below the post:

1. In today’s dollars, just the sales from Encyclopedia Britannica (EB) were $1.2 billion per year at the peak around 1990, and that doesn’t include sales from all of the other encyclopedias and reference books. Wikipedia’s revenues are about $50 million per year, so there’s no comparison between the contribution of encyclopedia sales to GDP and Wikipedia’s contribution. Wikipedia’s revenues are less than 5% of EB sales, and if EB had a 20% market share, Wikipedia’s revenues would be less than 1% of total encyclopedia and reference book sales.

2. In today’s dollars, classified newspaper ad revenue used to be about $26 billion per year at its peak around 2000. In 2010, Craigslist revenue was $122 million, less than 1/2 of 1% of newspaper classifieds. Last year, Craigslist revenues of $335 million would be a little more than 1% of peak newspaper ad revenues.

3. Pandora and Spotify together generate about $1.5 billion in annual revenues. Recorded music sales used to be about $20 billion per year.

4. Quality. In the case of Wikipedia, it’s far superior (more entries, daily updates) to encyclopedias. In the case of Pandora and Spotify, they are probably infinitely superior to buying CDs or LPs. Paying $10 per month to get access to an almost infinite selection of music is infinitely better than spending $120 per year on 6 CDs.

So isn’t is possible that traditional GDP statistics underestimate the economic value (and quality improvements) of services like Wikipedia, Craigslist and Pandora/Spotify?