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Thursday, December 04, 2014

Digital Services, Real GDP Per Capita, and Economic Well-Being

I’m trying to think clearly about economic well-being in the digital world.  I’m doing this in the context of thinking about teaching macro and about the use of real GDP per capita as a measure of economic well-being.  So these are hardly complete thoughts about the matter.  I’m stumbling around with the issue.
One of our primary measures of economic well-being is Real Gross Domestic Product per capita.  The following table presents data on RGDPpc for all the countries with a population of 50 million or more, based on the data found here.  (These countries account for about 75% both of world GDP and world population, as reported in the dataset.)



United States
United Kingdom
Burma Myanmar
Republic of Congo (Brazzaville)

$   700
$   400
$   200
Leaving aside the question of how well these data actually reflect economic well-being in these 24 countries (a ratio of about 250-to-1, comparing the US to Congo), there is, it seems to me, another significant difference, which I think I’ll call the digital divide.  One convenient measure of this (maybe) is Facebook usage.  Not surprisingly, 8 of the 10 countries with the largest number of FB users are also in the 10 countries with the highest RGDPpc (Russia and Turkey are in the high-income group; Indonesia and India are in the large-user base group). 
The question this raises for me is how services like FB are valued in the official statistics from which we calculate GDP (and GDPpc).  Users pay, directly, little or nothing for using many digital services (FB, reservation services such as Expedia, and so on).  Yet these services do apparently add value in the economy and thus contribute to economic well-being.
Although I can’t find anything completely definitive, it appears that digital services contribute to GDP mostly as intermediate services provided to businesses (or individuals) who advertise on their sited.  So, for example, Facebook reports $7.872 billion in revenue in 2013, of which $6.986 billion was from advertising, and 757 million worldwide users (by one metric; over 1.2 billion by another, but I suspect there’s some double-counting here).  That’s revenue of a little over $10 per user.  But essentially none of that revenue comes from users.
I don’t know how one might calculate the use-value of FB to a typical user, but surely it’s more than $10 per year.  My household has 2 FB accounts, and between us, we probably spend 2-3 hours a day on FB.  Call it 800 hours a year.  If we value our time on FB at $0.25 per hour (which I suspect is low; my alternative uses of time—like writing blog posts—are worth more to me than that), that’s $100 per year each, or more than 10 times as much contribution to GDP as can possibly be attributed to FB in its provision of advertising services (an intermediate, not a final, good). 
What, for the US, would that amount to?  With about 151 million users, we might attribute $3 billion (a disproportionate share) of FB’s revenue to its US member base.  But at $100 a year, users might value their time on FB at $15 billion a year.  A conservative guess, then, might be that digital services in the US are contribution in the range of $100 to $200 billion a year to GDP, which might be counted currently as between 10% and 20% of that.
This is not particularly large, in per capita terms—perhaps between $300 and $600 per capita in the US (between 0.6% and 1.2% of measured RGDPpc), of which our official measures might be capturing between $30 and $60.  Still, as the range of unpriced digital services expands, the gap between RGDPpc as a easure of economic well-being, and actual economic well-being, is only likely to grow.


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