Annex I. Link Between Consumption and Welfare Growth

1. The level of consumption, measured by price times quantity, understates welfare because it excludes the consumer surplus. In the diagram below, the initial position of the demand curve implies a quantity consumed at price p of q0, making consumption equal to the area of rectangle c. Consumer surplus, defined as the excess of the willingness-to-pay over the amount paid, is given by the part of the area under the demand curve that is above the price line, the triangle labeled s. Welfare is measured by the area under the demand curve out to q0, c+s.

2. The growth of real consumption equals (or approximates) the welfare growth. Assume that income growth causes the demand curve to shift to the right, so that the quantity consumed becomes q1. The price is constant, so nominal consumption growth, given by (c+Δc)/c, equals real consumption growth, q1/q0. Welfare growth, given by (c+Δc+s+Δs)/(c+s), also equals real consumption growth.

3. The weights used to calculate aggregate growth of real consumption are based on prices as the measure of value. These weights allow aggregate growth to approximate the welfare growth.


Effect of Increase in Income on Consumption and Welfare

Citation: Policy Papers 2018, 016; 10.5089/9781498307369.007.A999


Manufacturing of semiconductors, computers and communications equipment, software publishing, telecommunications, computer programming, data processing, and web portals.


Platform products covered by the CPC include searches, content and media, and e-commerce. But matching services and cloud computing are not covered.


For convenience, we speak of ICT services as a separate category from online platforms. However, they overlap, as the web portals classification within ICT services contains several types of online platforms.


See Garcia Herrero and Xu (2017). Another example of sensitivity to definitions comes from an analysis of firms in the United Kingdom. In 2010–2012, Nathan and Rosso’s (2015) expanded classification for the ICT sector includes firms accounting for 8.9 percent of business employment, while the current official classification is estimated to put 3.7 percent of business employment in the ICT sector.


Free services of governments and nonprofit institutions serving households are valued at the cost of production.


The quantitative impact may be small. Valuing the free media based on advertising revenue implies increases in the level of nominal GDP in OECD countries in 2013 that range from 0.4 percent of GDP in Greece to 1.3 percent of GDP in the United States (Ahmad et al., 2017). For growth, the effects are close to zero, or even negative. As discussed above, approaches that try to quantify the benefits as perceived by consumers yield larger estimates; however, such estimates are not suitable for inclusion in a measure of market and near-market production.


An indication that the estimate of 1.7 percent of GDP for the size of the distortion may be too high is that it is almost as large as the net sales of foreign affiliates reported in the ownership-based framework of the U.S. current account. Net receipts from sales of foreign affiliates amounted to 1.8 percent of GDP in 2012 (Hossio, 2018).


Output of ICT goods and services is about 6 percent of U.S. GDP in Table 1. Almost half of this is software, whose growth rate appears to be underestimated only slightly, perhaps by 3 percentage points or less. Quality improvement in computers and semiconductors seems to be underestimated, perhaps by as much as 10 percentage points, but their weight in the market output covered by the productivity calculations is just 0.5 percent.


Data on advertising revenues in Nakamura et al. (2016) imply that broadcast television was a more important innovation in the 1950s than online media in the 2000s, and judging by viewing time, television remains more important (Nielsen, 2016). Gordon (2016) also discusses examples, such as air conditioning.


Research on a CPI for televisions found that neglected quality improvements in models that entered during sample rotations caused price growth to be overestimated by 2 percentage points (Moulton, Moses and Lafleur, 1998).


The recommendations of Voorburg Group and the Ottawa Group provide a good basis.


A draft handbook on measuring digital trade may be available for comments in late 2018.


See Statistics Canada (2017) for a discussion of practical difficulties in estimating cross-border intermediation services, and the consumption of the platform-enabled services by non-residents or by residents while abroad.


Spotify is headquartered in Sweden, but has a Luxembourg holding company.


As of March 2017, Bitcoin’s total market capitalization was US$25 billion, compared with US$1.5 trillion of U.S. dollar currency in circulation. But in February 2018 its capitalization was almost $150 billion.


Furthermore, mismeasurement was also present before the slowdown began, and did not increase.

Measuring the Digital Economy
Author: International Monetary Fund. Statistics Dept.