Executive Summary

Digitalization encompasses a wide range of new applications of information technology in business models and products that are transforming the economy and social interactions. Digitalization is both an enabler and a disruptor of businesses.

The lack of a generally agreed definition of the “digital economy” or “digital sector” and the lack of industry and product classification for Internet platforms and associated services are hurdles to measuring the digital economy. This paper distinguishes between the “digital sector” and the increasingly digitalized modern economy, often called the “digital economy,” and focuses on the measurement of the digital sector. The digital sector covers the core activities of digitalization, ICT goods and services, online platforms, and platform-enabled activities such as the sharing economy.

Available evidence suggests that the digital sector is still less than 10 percent of most economies if measured by valued added, income or employment.

Digitalization has penetrated many activities, and, indeed, almost the entire economy could be included in the “digital economy” broadly defined. However, it is more realistic to focus measurement efforts on a concrete range of economic activities at the core of digitalization. While the term “digital sector” refers to a concrete perimeter of economic activities, the term “digital economy” is often used to indicate that digitalization (e.g., the use of Internet) has spread across all sectors of the economy, from agriculture to warehousing.

Next, the paper considers the question of the measurement error in GDP growth and productivity statistics. Insufficient adjustment for quality change in constructing the deflators for digital products, and gaps in measuring the sharing economy and activities of online platforms are two sources of underestimation. The available research suggests that the effect of under-measurement of the digital sector on estimates of US labor productivity growth is no more than 0.3 percentage points, smaller than the post-2005 slowdown in the growth in productivity of 1–2 percentage points.

Largely symmetric effect on price statistics, yielding a slight overestimation of inflation. The implied understatement of growth and productivity has been widely discussed in the last years. However, a symmetric effect on the measurement of inflation has been notably overlooked. If growth has been understated due to insufficient downward adjustment of price indexes in the presence of high quality increases in digital products and services, inflation must generally have been overstated by a roughly similar amount. This implication is particularly relevant for the assessment of the monetary policy stance in economies that have suffered deflationary pressures while experiencing a rapid digital transformation.

Free digital services that are self-produced, volunteer-produced, or produced by platforms that sell advertising and collect users’ data, have been proposed for direct inclusion in the definition of GDP, but a change in the conceptual framework of GDP to directly include “free digital services” in consumption would not be warranted. GDP is a measure of market- and near-market production valued at market prices, and, as such, is well-suited to address key policy questions. However, some free services enabled by digital products represent quality improvements that could be captured in real consumption by quality-adjusting the deflator. Also, research on expanding the measure of investment to include collection of data may imply a modification of the GDP production boundary.

Indicators of welfare from free digital products can, and should, be developed in the context of measurement of nonmarket production outside the boundary of GDP. Productivity gains in households’ time use for nonmarket production may be increasing welfare in ways not measured by consumption or GDP. Therefore, the old debate about measuring household non-market production is now even more pertinent. International and national institutions need to accelerate efforts to develop indicators of welfare growth from non-market production beyond the boundary of GDP.

Recommendations for overcoming the measurement challenges posed by digitalization include improving access by national statistics compilers specifically to administrative data and generally “Big Data.” For administrative data, this entails close cooperation of national government agencies, while in the broader case of Big Data, the cooperation should extend to partnerships between the private and the public sectors, including international organizations.

Approved By

Louis Marc Ducharme