Expanded GDP for Welfare Measurement in the 21st Century
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Chapter in forthcoming NBER book Measuring and Accounting for Innovation in the 21st Century, Carol Corrado, Jonathan Haskel, Javier Miranda, and Daniel Sichel, organizers
The digital revolution changed the character of economic activity in ways that are hard to measure using conventional GDP procedures. The information used by consumers to inform their choices has increased dramatically as a result of the Internet and its applications, and new mobile communication devices have greatly increased the speed and reach of its accessibility. The broad scope and rapid uptake of the digital revolution pose a challenge to GDP, but there is a larger issue: many of the benefits of the Internet and its applications by-pass GDP and go directly to consumers. This disconnect introduces a wedge between the growth in real GDP and the growth in consumer well-being, and a slower rate of growth of the former does not necessarily imply a slower rate of the latter. The conceptual framework for this analysis is developed in a previous paper (Hulten and Nakamura (2017, revised), which extended the conventional framework of GDP to include a separate technology for consumer decisions based on Lancaster (1966b), and developed the idea of Expanded GDP (or EGDP). In this paper, we use this framework to critique existing GDP and price measurement procedures and summarize the existing evidence on the size of the wedge between GDP and EGDP.