Policy by the Numbers: Measuring the Benefit as well as the Cost of the Internet Economy

Measuring the Benefit as well as the Cost of the Internet Economy

Tuesday, December 20, 2011

Most people have the sense that the Internet is a big and important part of the global economy. Attempts to quantify the economic size and importance of the Internet using traditional metrics bears out that intuition. For example, the McKinsey Global Institute (MGI) recently found that almost $8 trillion changes hands annually through Internet commerce, and BCG estimated that the Internet contributes 7% of the U.K.’s GDP. Indeed, the Internet is now a major contributor to GDP in the industrialized world. It constitutes 3.4% of GDP in large and developed economies and $1.672 trillion worldwide. When compared with sectors like agriculture or utilities worldwide, the Internet has a greater GDP weight. In other words, Internet-related expenditure already exceeds that of other major industries. Over the past five years, the Internet contributed 21% of GDP growth in advanced countries, showing that it’s an increasingly important macroeconomic engine of output.
But GDP is actually not a good way to calculate the total economic impact of the Internet. You can think of GDP as the sum total of all the costs in an economy - if it costs $1 to grow, ship, and sell an apple, then the $1 paid for the apple is added to GDP. But GDP does not reflect the value on top of cost that the consumer experiences. If the buyer of an apple values the apple at $2, the $1 in extra value is lost in GDP accounting. This issue is especially important with Internet products that are free. Consider Wikipedia, whose contribution to GDP is $0 even though millions of hours of effort have gone into producing and consuming its content!

MGI and others try to measure consumer surplus in addition to GDP. Unfortunately, it’s easy to measure costs and hard to measure benefits, since benefits show up in a lot of places and aren’t always written down. MGI’s study looks at a small number of ways in which consumers benefit from the Internet and finds $64 billion in consumer surplus in the US alone. This approach inherently underestimates consumer value since it only looks at a subset of all of the ways in which the Internet is valuable. For example, the MGI study does not attempt to place a value on the millions of hours of free video online, or on the value of social networking.

As a general rule, total economic surplus is the sum of producer surplus (GDP) and consumer surplus. Even this approach understates the value of the Internet, because of the Internet’s role as a general purpose technology in increasing productivity and lowering transactions costs throughout the non-Internet economy. When the Internet allows businesses to operate more efficiently and productively, the increase in output is not easily linked to the Internet, and these implications can be quite large. Lots of work remains to be done in understanding the Internet’s impact on productivity for the economy at large.

posted by Jonathan Hall, Policy Economist at Google

Policy by the Numbers

Measuring the Benefit as well as the Cost of the Internet Economy

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