Measuring Digital Economy

The dramatic rise of the digital economy presents unique challenges to the bean countries who try to measure the size of national economies. Most economic activity was about the production of standard stuff such as wheat or steel. The growing use of modern barter or peer to peer deals in what has been described as the sharing economy?

For example, we use to book airline ticket through a travel agent. Now, airline site allow us to book tickets on our own. The effect is same, but what used to once be a market transaction that involved payment to a travel agent has now become a household activity for which no money is paid. National Income has actually declined even though the underlying transaction is the same.

There is very unique way digital products are priced. They have high fixed costs but zero marginal costs. A software company spends big bucks to write its code. It can replicate this code at zero cost. Or think about a new age music band that can distribute its new album at minimal cost over the Internet despite the initial high costs of recording. The prices of many digital products tend to fall to zero because of their unique economies.

Many business models are designed to create other revenue streams such as advertising since the main product is given away free to build a large customer base. There is again not much agreement on how to capture these changes in national accounts. GDP is the cornerstone of all national economic statistics. It measures how much output is produced in a country in a particular period.

The digital economy presents a new set of challenges. Economists have struggled to understand what the transition from an economy of atoms to an economy of digit actually entails. Most of the emerging debates are not about the productivity effects of digital economy. They are more about how to measure an economy where some important distinctions are getting blurred.