GDP (gross domestic product) is the total monetary or market value of all the finished goods and services produced within a country’s boarders during a specific time period. While GDP measures production, it’s not meant to measure well-being. When it comes to the digital economy, several digital goods have zero price, and due to this, the welfare gains from these goods are not reflected in GDP. Digital technologies have transformed the types of goods and services consumed in modern economies.
GDP and metrics like productivity dominate discussions of economic growth and performance. This is calculated by GDP divided by hours worked. Through the use of online search experiments, we can calculate and estimate changes in consumer surplus. Keep in mind, GDP measures the real value of the purchases of all final goods by households, businesses, and government.
To assess changes in living standards and policies that may impact these changes, it’s necessary to properly measure the welfare gains from all goods. This includes goods without positive market prices, including many digital goods, public goods, and environmental goods. Keep in mind, Google & Wikipedia have a higher quantity and better quality results compared to libraries. Therefore, the changes in welfare gains are likely to be larger for digital goods than for other goods which have not changed as radically.
Consumers’ surplus is a measure of consumer welfare and is defined as the excess of social valuation of product over the price actually paid. For instance, if a person were willing to pay up to $150 for a pair of shoes but only had to pay $80, then that person would gain $70 of consumer surplus from that transaction.
Changes in consumer surplus are a good proxy for changes in overall well-being. The result is more quantity and lower prices for consumers, often lower than where they would be willing to pay for it. This difference between the market price (as determined by supply and demand) and the willingness to pay is the consumer surplus. And, with advances in digital technologies, it is now feasible to collect data about thousands of goods much more easily.
With advances in information technologies, we can now gather data at a large scale and close to real time. Free digital goods provide substantial value to consumers even if they do not contribute substantially to GDP. Feel free to click here and read the article written by PNAS to have a better understanding of how using massive online choice experiments can help measure changes in well-being.