Who can count on how the modern economy works?

The latest issue of the National Institute Economic Review, published this morning, focuses on research emerging from the Economic Statistics Centre of Excellence (ESCoE) Conference on Economic Measurement 2019.  Leading experts in the field provide in-depth analysis of various aspects of economic measurement, with six articles on issues ranging from the measurement of intangibles to welfare, cross-border data flows, the links between economic complexity and emergent economic activity and trade dependencies.

The six articles are:

• Measuring welfare beyond GDP, by Andrew Aitken (NIESR, ESCoE);
• Measuring the other half: new measures of intangible investment from the ONS, by Josh Martin (Office of National Statistics);
• Cloud computing, cross-border data flows and new challenges for measurement in economics, by Diane Coyle (University of Cambridge, ESCoE) and David Nguyen (NIESR, ESCoE);
• The mysterious cross-country dispersion in mobile phone price trends, by David M. Byrne (Federal Reserve Board of Governors);
• Exploring the link between economic complexity and emergent economic activities, by Alex Bishop and Juan Mateos-Garcia (Nesta);
• Distinguishing between imports for domestic use and for re-exports: a novel method illustrated for the Netherlands, by Oscar Lemmers and Khee Fung Wong (Statistics Netherlands).

ESCoE’s Director Rebecca Riley, who edited the collection, said: “We need a clearer picture of how the modern economy works, and for whom, to take effective decisions. This Review shows how academics, statistics users and national statistical agencies are working together to solve this problem.”

Measuring economic welfare matters because it affects the decisions made by government and society. Aitken argues that GDP does a reasonable job of measuring the marketable output of the economy (which remains important for many policies), but it should be downgraded, with more attention given to measures that reflect well-being. The paper reviews several developments in measuring welfare beyond GDP, including incorporating information on the distribution of income and wealth in the National Accounts, using time use as a measure of welfare, and the welfare consequences of ‘free goods’.

Only half of investment by firms is in physical capital, such as buildings and machinery. The other half is in intangible assets, such as branding, software and training. This has been true for the past two decades or more in the UK, but only if you step beyond measures in the National Accounts, which include only some intangible assets. Martin’s paper surveys ongoing work at the Office for National Statistics to develop measures of investment in intangible assets. The paper reconsiders some of the key assumptions typically made in deriving these estimates and proposes alternative approaches to measurement, resulting in different estimates of magnitudes.

Coyle and Nguyen argue that the digital transformation of the economy can pose serious challenges to traditional concepts and practices of economic measurement. They show how quality-adjusted prices of cloud services have been falling rapidly over the past decade, a phenomenon that is not captured by deflators used in official statistics. This enabled the spread of data-driven business models and lowered entry barriers to advanced production techniques, e.g. artificial intelligence and robotic-process-automation. A final challenge to measurement arises from the fragmentation of value chains and flows of intellectual property and data across borders. While digital technologies make it easy for value to be transferred within or between companies, existing economic statistics often fail to capture this at all.

Mobile phones have been central to ICT innovation since the introduction of the smartphone and constant-quality prices are a barometer of their economic impact. Official Consumer Price Indices (CPIs) indicate that impact differs wildly across countries: for the 2008–18 period, average annual rates of mobile phone inflation range from no change to a 25 per cent decline among 12 key countries examined in Byrne’s paper. Although evidence indicates certain fundamental factors are at play, mis-measurement may lead the spread in rates to be overstated.

Recent studies have shown a strong link between the complexity of economies and their economic development. There remain gaps in our understanding of the mechanisms underpinning these links, in part because they are difficult to analyse with highly aggregated, official data sources that do not capture the emergence of new industrial activities. Bishop and Mateo-Garcia address this gap by creating a measure of emergent technological activity in a location based on a combination of novel data sources including text from UK business websites. Their results highlight the potential value of novel, unstructured data sources for the analysis of the links between economic complexity and regional economic development.

Global trade in the 21st century is characterised by complex value chains. Exported goods cross borders many times before reaching their final consumer. Currently, estimates of the share of imports from a particular trading partner that is destined for re-exports rather than for the domestic economy, are crude at best. Lemmers and Wong develop a novel approach to derive these shares using micro-data at the trader level. The method is illustrated for the Netherlands, a major re-exporter. They find that non-European member states export to the Netherlands as much as €10 billion of commodities to be re-exported to the United Kingdom. The goods trade deficit between the Netherlands and the United States is drastically reduced when taking re-export flows into account.

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Notes for editors:
The research reflects the authors’ views and does not necessarily reflect the views of the institutions that they may represent.
For full copies of these papers and queries for the authors please contact the NIESR Press Office: Paola Buonadonna on 020 7654 1923 / p.buonadonna@niesr.ac.uk  / press@niesr.ac.uk 
The National Institute Economic Review is a quarterly journal of NIESR. Published in February, May, August and November, it is available from Sage Publications Ltd (http://ner.sagepub.com/) or at subscription@sagepub.co.uk   
Further details of NIESR’s activities can be seen on http://www.niesr.ac.uk  or by contacting enquiries@niesr.ac.uk. Switchboard Telephone Number: +44 (0) 207 222 7665
Further details of ESCoE’s activities are available at https://www.escoe.ac.uk or by contacting escoeinfo@niesr.ac.uk.