How to measure the value of free in the digital economy
New research is counting the gains from things we get for nothing
If the best things in life are free, measuring their value has always presented a challenge for economists. Now a team involving professor Kevin Fox, director of the Centre for Applied Economic Research at UNSW Business School, has attempted to work out their value.
“GDP does not capture the impact of free digital goods and services on people’s lives even as they transform work and leisure activities,” says Fox.
“That causes quite a lot of dissatisfaction among economists.”
Social media and other digital services such as WhatsApp and digital maps can have huge value for consumers, yet as their price is zero their value gets counted as zero, regardless of the quantity consumed.
Along with Erik Brynjolfsson, Avinash Collis, W. Erwin Diewert, and Felix Eggers, Fox has written the paper, GDP-B: Accounting for the Value of New and Free Goods in the Digital Economy.
“Using massive online experiments, we were able to ask a representative sample of the US population how much they would have to be paid in order to give up Facebook. They suggested on average of $42 a month,” Fox says .
"While our calculated benefits may seem large to some, to put them into context, the average welfare gain for each user of Facebook is calculated as $1.57 per week, which is less than the price of a cup of coffee.”
He adds that GDP is a good measure of domestic economic activity for goods that have a market price.
“With digital cameras in smartphones we are taking more photos than ever before, with the cost of each additional photo being zero. Hence, we are currently missing something important that reflects actual production and consumption."
The full value created by digital firms is not presently measured.
“Digital firms can make an extra copy of their product for zero cost. It costs Facebook essentially nothing to add an extra user. Yet the user receives a benefit from having access. If denied access to Facebook, they would need monetary compensation so as to achieve the same level of utility, or satisfaction, through the purchase of market goods,” Fox says.
He notes that the approach could be extended to measuring the benefits of infrastructure and environmental amenities.
“We’re pioneering a new way of measuring welfare change from free goods and services, and suggesting a way of extending GDP to capture the value inherent in these commodities.”
Fox has recently been appointed to lead a research group on the valuation of free digital assets and services for the UN/IMF/OECD/World Bank/Eurostat Intersecretariat Working Group on National Accounts.
“Given the interest from national and international statistical offices, it seems that our approach is being acknowledged as a constructive and practical way in which progress can be made,” he says.