Professor (Emeritus) Charles Hulten, along with his co-author, Leonard Nakamura of the Federal Reserve Bank of Philadelphia, have had their work mentioned in an article on the news website Quartz "13 economists on the research that shaped our world in 2017".  This article lists the Hulten and Nakamura paper, "Accounting for Growth in the Age of the Internet", in fourth place on this year's Quartz list.

The revolution in information technology has posed serious challenges for the measurement of the nation's Gross Domestic Product.  The challenge is particularly evident in the very rapid uptake of digital economy goods.  Surveys cited in the paper show that the fraction of U.S. households with using internet in their home went from one-in-five in 1997 to nearly three-quarters in 2012; the percentage of adults who use at least one social media site increased from less than one-in-ten in 2005 to two-thirds in 2015; and, market penetration of smart phones more than doubled from 2011 to 2016, from 35 percent to 77 percent. 


How has this rapid growth affected measured GDP?  Not all that much, perhaps.  GDP is essentially a measure of market activity in the economy, whereas the internet and IT applications (search engines, maps, social media, etc.) are made available to consumers largely without direct charge (though systems access fees may apply and marketers pay providers for information and advertising).  As a result, there is no direct dollar transaction that can be added to GDP, nor are there the prices and quantities needed to figure how much the internet and it applications have added to the growth of constant dollar (real) GDP.  This is an issue of current importance because per capita real GDP growth has declined from its 1995-2006 rate of 2.3% to 1.5% from 2010 to 2015.  This is the same period over which the digital economy took off, raising the possibility that the growth in consumer welfare may be stronger than it appears based on GDP.

Hulten and Nakamura argue that this disconnect may reflect the possibility that many of the benefits of the free information available over the internet bypass GDP entirely and go directly to the consumer.  How might this happen?  The information explosion allows consumers to make more efficient use of their existing incomes by improving awareness and use of alternative communication and entertainment possibilities (many free), providing more timely access to information, and superior matching of goods to wants.  In other words, consumers get more bang for their buck.  How big a bang is hard to determine absent market transactions to indicate the value, but those studies that have examined various aspects of the problem using non-GDP techniques report estimates in the range of $100 billion to $1 trillion.

The Hulten-Nakamura paper is largely theoretical, and intended to provide a new growth accounting paradigm that permits the various empirical non-GDP estimates to be fitted into a common framework that includes GDP.  One feature of this paradigm is that living standards can rise at a greater rate than real GDP growth, which may shed light on the question of how the latter can decline in an era of rapid innovation.

Prof Hulten