Measurement Issues in the Digital Economy

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Measurement Issues in the Digital Economy

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Digital Economy

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Summary

Digital technology and other drivers of structural economic change raise several significant measurement challenges. In this project we considered the implications for economic measurement arising from digital business models, including the trend towards servitisation; frequent incremental innovation and the concepts of ‘quality change’ versus consumer surplus; the globalisation of online businesses; and the value of data flows. Our work has helped to solidify ONS thinking on the ‘GDP versus welfare’ agenda and contributes to the international debate on three key measurement challenges: digitalisation, globalisation and well-being.

Overview

Digitalisation raises manifold conceptual challenges and practical issues for economic measurement. In this project we developed a taxonomy illustrating the scope of digital changes that raise measurement issues and explored the potential magnitudes of some of these for key statistics and economic concepts. We then made suggestions for steps that could be taken to better measure developments in the digital economy.

Methods

We considered measurement issues arising from digitally enabled substitutions in activity across the conventional production boundary. Production boundary issues are not new, as conventionally defined GDP statistics account for the monetary cost but not the time cost of consumption and production. This means that changes in the way in which time is allocated between market and home production affect measured growth and productivity, as well as economic welfare. While it is impossible at present to know the scale of these substitutions, we examined a range of evidence to establish a picture of the potential magnitudes involved. Statistical agencies do not currently collect the data needed to measure the scale of the switch from market to home production due to digitalisation, but the evidence we considered suggests that it may be enough to make a contribution to understanding the current productivity puzzle. We considered an alternative understanding of economic progress to real GDP growth. This combined an extended utility framework – considering time allocation over paid work, household work, leisure and consumption – with measures of objective or subjective well-being while engaging in different activities.

We also considered quality adjustment of price indices for telecommunications services and cloud-based IT services. This work was carried out with ONS colleagues Mo Abdirahman and Richard Heys and with the Institution of Engineering and Technology. We considered two methodologically distinct options to estimate the potential bias in the current deflator, informed by both economic and engineering perspectives. Our research indicated that the current deflator for telecommunications services is upward biased and that telecommunications services prices may have fallen considerably more than suggested by the current deflator.

Our work on cloud-based IT services involved the construction of both nominal and quality-adjusted price indices for computing and storage products. We used prices published online and price lists shared with us by Amazon Web Services, along with information on the number of floating-point operations per second by central processing unit core, which is a common proxy for the quality of a processor. The market for cloud services is large and growing rapidly. Our research suggested that quality-adjusted prices have fallen by up to 5.5 per cent per quarter.

We collated web-scraped evidence on the extent of factoryless manufacturing in the UK and explored this through company case studies based on systematic analysis of annual reports and websites. We found that contract manufacturing is more prevalent amongst UK firms in the chemicals and pharmaceuticals sectors, whereas in the US it is more prevalent in electronics.

Our work with the OECD brought together industry, economic and statistical experts to develop recommendations for measuring and collecting data on the value of new forms of data, generated from digitally enabled activities, that is currently not reflected in the National Accounts or in international trade statistics.

Impact

Our work on the production boundary and cloud computing and on the measurement of price change in relation to telecommunications and cloud services has been presented at conferences at the OECD and the International Monetary Fund (IMF), impacting on the international debate as the UN steers towards a revision of the System of National Accounts.

Our work has also been presented and discussed at the World Economic Forum at Davos, the 2018 meeting of the G7 finance ministers, in UK government departments and at academic conferences. Our work on telecommunications deflators has provided options for consideration for implementation into the UK National Accounts and is also being considered by Statistics Canada and the US Bureau of Labor Statistics.

External project papers

Coyle, D. and Nguyen, D. (2020) “No plant, no problem? Factoryless manufacturing, economic measurement and national manufacturing policiesReview of International Political Economy, 16 Jun 2020 https://doi.org/10.1080/09692290.2020.1778502

Coyle, D. and Nguyen, D. (2019) “Cloud Computing, Cross-Border Data Flows and New Challenges for Measurement in EconomicsNational Institute Economic Review, Vol 249, Issue 1, 2019 Sage Journals https://doi.org/10.1177/002795011924900112

Coyle, D. (2018) “Do-it-yourself Digital: the Production Boundary, the Productivity Puzzle and Economic Welfare“, Economica, Volume 86, Issue 344, Wiley https://doi.org/10.1111/ecca.12289

Nguyen, D. and M. Paczos (2020), “Measuring the economic value of data and cross-border data flows: A business perspective“, OECD Digital Economy Papers, No. 297, OECD Publishing, Paris, https://doi.org/10.1787/6345995e-en

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