Measuring the Economy in an Increasingly Digitalized World: Are Statistics Up to the Task?

What Is the Digital Economy?

isruptive technologies and industries, the sharing economy, the digital economy — these terms are all synonymous with the transformational changes occurring in the way businesses and individuals produce, deliver and consume goods and services in an increasingly digitalized marketplace.

Enabled by technology and social trends, the digitalization of the economy is changing the way in which economic agents behave. Not long ago, most people would use a travel agent to book a vacation, and go to a “brick and mortar” store to buy a new pair of shoes or rent a DVD or VHS tape to watch the latest movies. Today, we can do this from the comfort of our homes. We can search the internet and compare hundreds of hotel prices ourselves, rent someone’s home for our vacation, buy products from all over the world and stream endless videos without ever leaving the house. While the final products have not drastically changed, a movie is still a movie after all, digital technologies and new business models are altering the way goods and services are delivered and consumed. 

As more and more businesses across various industries embrace new digital technologies, the economy is becoming increasingly digitalized (or digitally enabled). Online shopping and e-commerce are mainstream channels for consumption, and products themselves are moving from tangible mediums (CDs, videos, books) to digital ones. With the proliferation of digital intermediary platforms, the actors involved in a typical online transaction are also changing. While there used to be two primary actors involved in any given transaction (for example, the buyer and the seller), online transactions increasingly involve multiple actors, including but not limited to the one that facilitates the transaction, the one that processes the payments between buyers and sellers, and the one that distributes the final products. In addition to increasing the number of actors involved, digital intermediary platforms are also enabling private individuals, which have typically been consumers, to more easily produce goods and services themselves. 

The term digital economy is being put forward to try and capture or put a box around the new ways consumers, producers and markets are interacting and exchanging goods and services. While the term has gained significant prominence, there is not yet a definition that encapsulates what is meant by the digital economy. It is unclear if such a definition will ever emerge, in part because the digital economy is pervasive — it is not so much a piece or sector or industry of the economy, rather it is transforming the entire economy. Accordingly, it is more appropriate to refer to the digitalization of the economy rather than the digital economy.

While the digitalization of everything is transforming both our business and personal lives, there is little information currently available that helps us understand the economic, social and environmental impacts. It is rather ironic that in a digital age, where information is all around us and can be obtained from a simple command such as “hey, Google” or “hey, Alexa,” we lack basic statistics that help us understand the transformation that is occurring.

There is unquestionably tremendous value in data, evidenced by the emergence of new products and services driven by vast amounts of data and information and the increasing concern among policy makers about the impacts that digitalization and data are having on society. The ownership of this data is an important policy question. Should data be treated as a business asset and exploited for profit or is it a public good? Should this ownership be regulated and, if so, under what mechanisms? Issues of privacy and sovereignty in a digital age are also important concerns. As such, it is more important than ever that national statistical organizations (NSOs) such as Statistics Canada provide insight into the impact digitalization is having on the economy and society at large.
 

Challenges in Measuring an Increasingly Digitalized Economy

From the statistical perspective, the issues around the digitalization of the economy and society are fundamental. There has been significant international debate and discussion in recent years about measuring the economy in an increasingly digitalized world. The debate has centred on two questions. The first is whether the statistical frameworks used to measure the economy, such as the Balance of Payments and the International Investment Position Manual (International Monetary Fund [IMF] 2009) and the System of National Accounts (European Commission et al. 2009) adequately capture economic activities related to the digitalization of the economy. The second, less discussed, question is whether statistical agencies have the proper statistical infrastructure to capture, categorize and process the information into meaningful statistics. This essay explores both issues. First, it argues that, for the most part, the goods and services are not new — they are just being delivered in new ways and therefore the conceptual and statistical frameworks are adequate and up to the task. Second, the changing nature of digital goods and services is a major challenge for statistical agencies as these products and services are increasingly difficult to measure. Statistical infrastructure must be adapted to capture changes, otherwise there could be a significant deterioration in the quality and related detail of key official statistics such as GDP, the Consumer Price Index (CPI) and the unemployment rate.

Do We Have the Correct Conceptual Frameworks?

The main argument put forward by individuals who argue the frameworks are no longer sufficient is that digitalization has resulted in significantly more “free goods.” They argue that the “utility” of these free goods — and their impact on productivity — needs to be captured in key macroeconomic indicators such as GDP in order for these measures to remain relevant. For example, imagine that 10 years ago someone wanted to learn how to program a website. They may have purchased a book, taken a class or signed up for a seminar — all of which would have cost something and would have contributed to GDP. Today, if someone wants to learn how to code, they would probably not sign up for a course and certainly would not buy a book. Instead, they would visit a number of websites where information about coding and often samples of code are freely available. Where in the past this information cost something, today it is free. Should this “free stuff” not somehow be monetized and included in GDP? Surely this free stuff contributes to one’s human capital and productivity and, if it is not captured, it will impact productivity measures.

At first glance, things today look a lot different than they did even 10 years ago — but if we look closely, the sharing of information and “learning from a friend” has been taking place for ages. A decade ago, if someone wanted to build a website, a friend who had programming skills may have offered to share their knowledge and give them lessons or free code to practise on — none of which would have been included in GDP. The difference today is that there are many more (anonymous) friends willing to share knowledge and the ability to find the information has increased the speed at which tasks can be accomplished. However, at the end of the day, these activities were not included in GDP in the past and they should not be included today. It just happens that the velocity of all this activity has increased. 

This does not mean that all this digitalization has not had an impact on GDP. In the above example, there are a number of important things included in GDP today that were not included in the past (mostly because they did not exist). In order for someone to acquire the information to build a website they require access to the internet, equipment such as a computer and router, and likely software to enable the search — all of which they had to purchase or rent. In fact, obtaining the “free code” and building a website could be quite costly.

Another argument from the conceptual framework point of view is that GDP does not properly capture the benefits or utility consumers receive from an increasingly digital world. This argument is best illustrated by an example and by drawing on some economic theory. Let us assume that someone pays $500 for a smartphone. However, the value of utility that they get from the phone can actually be far more than the $500 they paid for it. The phone allows them to be in constant connection with friends and family, they can find directions when lost and get the latest news from around the word. In fact, many people may have paid $1,000 for the cell phone. This additional $500 in the perceived value of the phone is referred to as consumer surplus or surplus utility.

Many people argue that this extra utility users get from their smartphones should be captured in GDP and that the slowdown in GDP (and productivity) is because these measures are not properly capturing surplus utility. The problem is that adding utility to GDP would turn it into something it was never intended to be. GDP is a measure of production and not utility. In fact, GDP does not attempt to measure the welfare or consumer surplus that individuals derive from goods and services. Rather, it is a measure of the cost, expenditures spent and income earned from production. Adding a measure of utility to GDP would make it subjective and thus it would no longer be a credible measure of the evolution of the economy.

A third argument put forward for why conceptual frameworks are insufficient is that the products being produced and consumed today have changed and are not properly captured. If one looks closely, they would find that the digitalization of the economy has not fundamentally altered products. As individuals, we still consume music, books, ride services, accommodations services and entertainment, but these goods and services have been digitalized. Conceptually, the frameworks include digital products; however, they may need to be updated to properly articulate the production and consumption of digital products.

Is the Statistical Infrastructure Equipped to Capture a Digitalized Economy?

The manner in which digital products are consumed and distributed is creating significant challenges for statistical organizations around the world. As the prevalence of digital goods and services increases and new digital intermediary platforms emerge, statistical organizations must address these issues, otherwise there could be a deterioration in the quality of many key economic indicators. These challenge can be grouped into five broad categories. 

The first relates to something referred to as global consumption — meaning that for many products, such as videos, music, clothing and electronics, individuals are no longer restricted to purchasing products from local retailers, but rather can purchase from anywhere in the world using online platforms. This has major implications for key economic indicators such as the CPI, international imports and exports, and household expenditures. 

Second, not only are individuals global consumers, but they are also increasingly producing many goods and services themselves — referred to in the national accounts as household production. Traditionally, in most countries, household production was limited to a few industries, such as real estate, agriculture and household services. Today, households are now key producers in transportation services industries (for example, private individuals who are Uber drivers), food and accommodation industries (for example, Airbnb) and culture and recreational industries (for example, earning income from uploading music or videos onto social platforms such as YouTube). The increasing production from households has important measurement implications for the economy as well as the labour market.

Third, the digital economy has resulted in the proliferation of digital intermediary platforms, such as eBay, Amazon, Uber and Airbnb. These digital platforms provide intermediary and sometimes financial services, either implicitly or explicitly, that need to be classified and recorded within our national accounts. 

Fourth (and both a measurement and conceptual challenge), the digital economy is causing national accountants to rethink how intellectual property products are measured, as well as what constitutes intellectual property. There is little debate that most businesses today are leveraging their data to drive sales, yet the databases and the investment made to develop these databases are not being properly captured.

Fifth, the digital economy is changing the way people pay for goods and services — in fact, it is changing the nature of money. The emergence and growth of cryptocurrencies is raising many questions about regulation and security and may lead to a significant transformation of financial industries. For the last 30 years, the majority of Canada’s economic indicators have been estimated using information obtained from domestic businesses, typically through surveys. These domestic businesses held the majority of the information that explained the economy. 

With the digitalization of the economy, an increasing share of this information is held by households, by digital intermediary platforms or by businesses operating outside the economic territory of Canada. This change means that national statistical agencies such as Statistics Canada need to update or modernize the statistical system to continue to provide their users with a comprehensive, credible and consistent set of economic data. This will allow policy makers, businesses and individuals to better understand the social and economic implications of an increasingly digitalized world.

Measuring the Digital Economy: An International Effort

Statistics Canada is not alone in its efforts to measure the digital economy. NSOs across the world are facing similar challenges. Given the strong link between digitalization and global trade, global consumption and global information sharing, it is important that the international community work together to develop common definitions and classifications, and share best practices in collecting information about and measuring digital products and activities. 

International organizations such as the Organisation for Economic Co-operation and Development (OECD) and the IMF have set up work programs and international working groups to advance the statistical and conceptual frameworks that will help NSOs measure the digital economy in a consistent manner. This work involves everything from defining the term digital economy to experimenting and testing ways to capture the welfare benefits associated with the digital economy in economic accounting frameworks. The international organizations have also organized conferences and workshops where they have brought together experts to look at issues such as the relationship between digitalization and declining productivity growth. 

Individual NSOs such as the Bureau of Economic Analysis in the United States have been experimenting with ways to expand the boundaries of GDP to account for the consumption of “freely” available information. The Office of National Statistics in the United Kingdom has been re-examining the way it accounts for quality change in the prices of digital products and services such as household broadband services. All of this work is being done to ensure data users have the information they require to properly understand what some people are referring to as a “data revolution.”

Producing Meaningful Statistics on the Digital Economy

For its part, Statistics Canada has started to adapt how it produces meaningful statistics that will help policy makers, businesses and academics assess the impacts of an increasingly digitalized economy. However, the agency needs to increase the speed at which it responds and its flexibility to adjust in order to address the measurement challenges brought on by an increasingly “disruptive” digital economy. Key areas of investment currently under way include:

• “Surveying” digital platforms — household production is increasing but statistical agencies cannot afford to survey individuals directly to estimate all of these productive activities. Instead, statistical agencies need to work with the digital intermediary platforms to obtain aggregate information related to the productive activities of households in their jurisdictions. 
• New products such as digital intermediation services need to be added to classification systems and properly recorded. An added complexity is the strong possibility that these transactions often include an international component. These transactions need to be unbundled and decomposed into their separate flows. Statistics Canada is evaluating and updating its classification systems to account for these new types of transactions. 
• The fact that households are now direct importers and exporters needs to be properly recorded in the economic accounts. Imports of goods and services directly by households are growing, yet there are no statistical instruments that capture this activity. Statistics Canada is investigating the use of alternative sources of information to produce aggregate estimates of household imports, exports and the income households generate from the production of digital cultural products such as music and videos distributed on digital social platforms.
• The agency has established a research function that stays abreast of new digital developments and undertakes the tedious process of identifying if and how the new type of activity is recorded in the economic statistics program.
• The agency is also capitalizing on the new technology itself to enrich its data holdings. For example, using techniques such as web scraping and application programming interfaces to replace data collection from traditional means. 
• Finally, the agency is looking at how it measures data itself, and trying to determine the value of data as an asset in the production of goods and services and determining if estimates of national wealth need to include an estimate of the nation’s data holdings.

At this point, it is safe to say that the box we put around what we call “the economy” is still the right size. The problem and challenge is more measuring what is going on inside the box and ensuring we have the right tools to assemble the pieces that provide all Canadians with a comprehensive, consistent and informative monthly, quarterly and annual picture of the economy. Exciting times indeed!

Statistics Canada (StatCan) holds the copyright to this essay. It is published under a licence from StatCan.