Statisticians struggle to accurately measure the digital economy

IMF economists point out that digital products and services are difficult to capture in economic statistics, which leads to an underestimation of GDP growth and an overestimation of the level of inflation in many countries.
Statisticians struggle to accurately measure the digital economy

(Lauren K, CC BY-NC)

Digitalization encompasses a wide range of new applications of information technology in business models, as well as products and services that are transforming the contemporary economy and society. This phenomenon has both positive and negative effects. It affects the economy in a positive way, because it contributes to an increased business activity. The negative impact is due to the possible disruption of economic interactions. According to the available estimates, the digital sector currently accounts for less than 10 per cent of most economies if measured by value added, income or employment.

The digital sector still accounts for less than 10 per cent of most economies if measured by value added, income or employment.

In the opinion of the IMF economists, the measurement of the digital economy is difficult due to the lack of a generally accepted definition of the “digital economy” or the “digital sector” and the lack of industry and product classification for Internet platforms and associated services.

In their report the authors focused on the measurement of the digital sector, which covers the core activities of digitalization, ICT (information and communication technologies) goods and services, online platforms, and platform-enabled activities, such as the sharing economy. The objective was to check whether the previous statistics on GDP growth and productivity growth were calculated properly and what impact the productivity of the digital sector had on the determinants of economic growth.

The results of the studies indicate an underestimation of economic growth and an overestimation of inflation in many countries, which results mainly from insufficient adjustment of the deflator relating to digital products (e.g. in order to capture the quality increase in the level of real household consumption thanks to free digital products and services) and the gaps in measurement of the sharing economy and the activities of online platforms. According to the analysis of data in the United States, the underestimation of the production level in the digital sector could take away 0.3 percentage points from the growth rate of labor productivity in the US, which in turn translates into an underestimation of the GDP growth rate.

Moreover, the authors of the report note that if economic growth was underestimated as a result of an underestimation of the digital sector, then the inflation level must have been overstated by a roughly similar amount. The economists are basing their conclusions on the assumption that the introduction of new and improved digital products affects the cost of living through three main channels:

  • Firstly, digital products frequently undergo quality improvements that are difficult to measure;
  • Secondly, digital products enable the customers to achieve the same utility at a lower price than non-digital products;
  • Thirdly, the introduction of e-commerce (including, among others, search engines and access to reviews of particular goods) has improved customer access to products that better meet their needs.

Taken together, these channels may result in an overestimation of the prices of digital products, which in turn will lead to an overestimation of inflation levels. The IMF economists point out that this implication is particularly relevant for the assessment of the monetary policy stance in economies that have suffered deflationary pressures in the last decade while simultaneously experiencing a rapid digital transformation.

It is, therefore, necessary to improve the collection and classification of data concerning the digital economy as that will allow a better measurement of digital products and transactions, which in turn may improve the measurement of inflation or the changes in the balance of payments affecting the stability of the external sector, as well as the financial flows (which, in turn, is important for the prevention of money laundering and tax avoidance).

The IMF analysts emphasize that international cooperation between relevant national governmental agencies is necessary in order to improve the quality of measurements related to digitization. In the case of large data sets (big data) such cooperation should involve partnerships between the private and public sector, including international organizations.

(Lauren K, CC BY-NC)

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