The modern economy is a complex entity, subject to a continual process of change and development. The challenge is to ensure that economic statistics — and the methodologies used to construct them — evolve so as to capture these changes such that they remain relevant, accurate, and timely.
The national accounts provide the basic framework for monitoring the evolution of economic activity, incomes, and expenditure at the national and sectoral levels. As Diane Coyle points out in her 2014 book, GDP: A brief but affectionate history, these were first developed in the 1930s and 1940s to systematically measure economic activity during the Great Depression and wartime economic planning. Today, the national accounts are central to the decisions of policymakers and businesses.
Evolving measurement methods
The way we measure the economy has evolved since then in the attempt to keep pace with the changes in the economy, but this has also become increasingly difficult. Recent technological advancements have radically altered the way people conduct their lives today, both at work and play. The digital revolution has not only led to rapid quality improvements and product innovation as a result of advances in computing power, but also to new ways of exchanging and providing services as a result of increased connectivity. These developments pose a serious challenge to the way we currently measure economic activity. In this context, eight months ago I was tasked by the UK Chancellor of the Exchequer to assess the UK’s current and future statistical needs. The result has been recently published (Bean 2016).
One particular challenge for economic measurement stems from the fact that an increasing share of consumption is made up of digital products delivered at a zero price or funded through alternative means such as advertising or selling information about customers to third parties. While representing a clear value to consumers, digital products available at a zero price are entirely excluded from GDP, in accordance with the internationally-agreed statistical standards.
Music industry and internet service examples
Take, for instance, the music industry. CDs, the dominant medium in the 1990s, have now largely been superseded by a swell in online downloads and streaming services – many of which are available for free or at a flat rate subscription. So the switch to the downloaded format is not reflected in a similar surge in revenues, but instead a sharp fall in both revenues and margins (see Figure 1). In the UK, while the number of streamed tracks has roughly doubled each year since 2012, the revenues from subscriptions have been rising by only 60% each year.
In the face of this evolution, record labels have become more involved with licensing live music and associated merchandise. For example, by 2011 less than half of the revenues of the UK records industry came from physical product sales (Page and Carey 2011). But estimates of GDP are hardly invariant to a different choice of business model. Business-to-business transactions count as intermediate inputs rather than value added. Consequently, a large fraction of the production and consumption of the music industry ends up not being reflected in aggregate GDP.
Figure 1. Comparison of units and value of US music sales
Notes: Analogues includes cassette, cassette Single, LP/EP, Vinyl Single, 8 – Track, and Other Tapes. Digital (physical) includes CD, CD Single, Music Video, DVD Audio, and SACD. Digital (immaterial) includes downloaded single, album, music video, ringtones and ringbacks, Kiosk, sound exchange distributions, paid subscriptions, on-demand streaming (ad-supported), and synchronisation. Right panel is in real terms.
Source: Recording Industry Association of America.