In the information age, GDP statistics can be misleading. Thousands of new information goods and services are introduced every year and yet according to the GDP, the information sector has about the same share of the economy as it did 25 years ago.
But don’t we have access to more information than ever before? Yes, we do, but the statistics don’t reflect this because while online information may be constantly updated and easily accessible, its price is radically lower than that of its physical counterparts -- if it even has a price.
Take the recording industry as an example. Consumers now purchase more of their music online, using iTunes for instance, than they do in the form of physical media, such as CDs. As purchasing habits have changed, the sales of CDs, cassettes and records have also declined -- down from 800 million units in 2004 to just 400 million units in 2008. However, in 2008, people purchased and downloaded more than 1 billion digital songs, along with buying more than 50 million digital albums.
But this increase in units doesn’t translate into more revenue. In fact the opposite is true: combined revenue from record companies’ song sales went from more than $12.3 billion in 2004 to $7.4 billion in 2008 -- a 40% decline.
The recording industry is disappearing from GDP statistics. Have people stopped listening to music? Of course not. But GDP measures current market value production, so if you listen to a free song, you’re not contributing to the GDP. Or, if you download three songs from an album, you’re paying $3 on iTunes rather than $18.99 for the CD. Consumer surplus has actually soared, even if the contribution of information goods to GDP hasn’t.
This article is adapted from “What the GDP Gets Wrong (Why Managers Should Care)” by Erik Brynjolfsson and Adam Saunders, which appeared in the Fall 2009 issue of MIT Sloan Management Review. The complete article is available at http://sloanreview.mit.edu/smr/.