What is the GDP Impact of Free Technology?

Increasingly, economists are beginning to ask the question, “Is GDP, which measures the value of products and services sold and bought, being underestimated by the widespread use of free technology?”

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What is the GDP Impact of Free Technology?

What is the GDP Impact of Free Technology?

From search engines to GPS, the mark of this latest iteration of technological evolution is that so much innovation is made available to consumers for free. Despite the advent of companies like Google, Uber and Facebook, economic growth has been below trend for the last decade or more. Increasingly, economists are beginning to ask the question, “Is GDP, which measures the value of products and services sold and bought, being underestimated by the widespread use of free technology?”

In a speech in early October, Jerome Powell brought this issue front and center, suggesting that government statistics do not fully reflect the economic value of never getting lost or being able to compare prices from multiple retailers before making a purchase.

A recent paper written by three academics studying this issue arrived at a number of surprising conclusions, the highlights of which are outlined below.1

  • The information sector share of total nominal GDP (about 4-5 percent) was the same in 2016 as it was 35 years ago.
  • People have been enriched by replacing goods that once came with a cost (e.g., CDs, DVDs and encyclopedias) with zero-price online services (e.g., Pandora, YouTube and Wikipedia). Yet this replacement has had the effect of detracting from GDP.
  • To gauge the GDP impact of free services, researchers sought to ascertain the monetary value that consumers placed on free technology platforms. The perceived value varied depending upon the service, but here are some example “valuations”:
    • Consumers would need to be paid $17,530 per year to stop using all search engines;
    • It would take an annual payment of $3,648 to stop consumers from using mapping software; and
    • For $322 per year, consumers would drop all social media.

Naturally, these dollar values vary depending upon age, income and the degree of necessity in an individual’s life. The upshot is that GDP growth is by no means a comprehensive benchmark for consumer well-being.

The Fed has done its own work in trying to quantify the impact of free digital services on GDP and, in one analysis, found that during the 2007-2017 period real GDP growth would have been higher by 0.44 percentage points on an annual basis.2

Though this information may be of limited value to an advisor’s investment decision process, it is, nevertheless, interesting. Perhaps the Fed can begin a new line of inquiry: What is the inflation impact of goods and services being subsidized by scores of technology companies flush with capital?

Sources:

  1. https://www.pnas.org/content/116/15/7250
  2. https://www.federalreserve.gov/econres/feds/files/2019049pap.pdf

Please reference disclosures: https://blog.americanportfolios.com/disclosures/

About The Author

Cliff Walsh, CFA

 

Chief Investment Officer 
631.439.4600 ext. 277 

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