Monday, March 11, 2013

Do We Need To Supplement or Replace GDP as Our Key Economic Indicator:

An article in The Economist describes a number of studies showing that consumer surplus is quite high from Internet applications:

  • 'Shane Greenstein of Northwestern University and Ryan McDevitt of the University of Rochester calculated the consumer surplus generated by the spread of broadband access (which ought to include the surplus generated by internet services......The authors reckon that by 2006 broadband was generating $39 billion in revenue and $5 billion-$7 billion in consumer surplus a year. Based on its share of online viewing, Mr Greenstein thinks Wikipedia accounted for up to $50m of that surplus..........the advent of new services such as Google and Facebook meant internet access in 2006 was worth much more than in 1999. So the surplus would have been bigger, too."
  • 'IAB Europe, a web-advertising industry group, McKinsey, a consultancy, asked 3,360 consumers in six countries what they would pay for 16 internet services that are now largely financed by ads. On average, households would pay €38 ($50) a month each for services they now get free. After subtracting the costs associated with intrusive ads and forgone privacy, McKinsey reckoned free ad-supported internet services generated €32 billion of consumer surplus in America and €69 billion in Europe. E-mail accounted for 16% of the total surplus across America and Europe, search 15% and social networks 11%."
  • "Another way to infer consumer surplus is from the time saved using the internet. (Social scientists) asked a team of researchers to answer questions culled from web searches. The questions included teasers like: “In making cookies, does the use of butter or margarine affect the size of the cookie?” On average, it took participants seven minutes to answer the questions using a search engine, and 22 minutes using the University of Michigan’s library. Hal Varian, Google’s chief economist, then calculated that those savings worked out to 3.75 minutes per day for the typical user. Assigning that time a value of $22 per hour (the average wage in America), he reckons search generates $500 of consumer surplus per user annually, or $65 billion-$150 billion nationally."
  • "Erik Brynjolfsson and Joo Hee Oh of the Massachusetts Institute of Technology note that between 2002 and 2011, the amount of leisure time Americans spent on the internet rose from 3 to 5.8 hours per week. The authors conclude that in so far as consumers must have valued their time on the internet more than the alternatives, this increase must reflect a growing consumer surplus from the internet, which they value at $564 billion in 2011, or $2,600 per user. Had this growth in surplus been included in GDP, it would have raised economic growth since 2002 by 0.39 percentage points on average."
I can think of other areas. There must be a considerable consumer surplus from watching movies on television and the Internet (doing so is more convenient and cheaper that going to a movie theater). eBay and online used book sellers allow consumers to buy with more selection and lower prices, thus almost certainly increasing consumer surplus over bricks and mortar stores.) Indeed, the discounts provided by Amazon and other online stores that are challenging bricks and mortar stores suggest more consumer surplus.

The GDP measures that have been dominating economic discussions of course are silent on consumer surplus. If consumer surplus increases significantly with respect to the cost of goods and services, then simply following GDP will fail to adequately capture the evolution of the economy.

Indeed, the French have shown that they prefer leisure time and long vacations to increased work, production and pay. Perhaps increasingly per capita is inadequate as a measure of quality of life, and thus as a basis for economic policy.

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