Three challenges of measuring the digital economy

Adam Morehouse, senior economist/director at Dun & Bradstreet, outlines the challenges we must face to achieve positives from measuring the digital economy

1May

Try to separate the digital economy from the economy as a whole. Not easy, is it? The world today is so dependent on technology that the line between the tangible and the digital has blurred almost beyond recognition.

Measuring the impact of the digital economy might not be easy, but businesses, regulators and market watchers still need to know how. As the world continues to expand into the virtual arena, businesses must learn to evaluate the impact of their online presence if they expect to survive and grow in the long term.

Real money from digital moves

Many of the traditional economic measurements, such as gross domestic product (GDP), have failed to keep pace with accelerated technological development. Free services such as search engines do not show up in GDP, but those capabilities are central to modern life – and billions of dollars in revenue depend on them. These efficiency enhancements grease the wheels of e-commerce, cutting transaction costs that had been previously accounted for.

Without a structure to measure similar technological impact, businesses and other invested organizations can never be sure about the state of the digital economy and its economic impact.

But where should we set the boundary lines? The digital economy might refer to any use of digitized data or internet-powered processes. These days, that includes just about everything. Even cash-only shops frequently advertise their products or services online. Any measurement that includes anything tangential to the digital will inevitably become too broad.

Unfortunately, the opposite does not work any better. If we narrow the field to online stores or services alone, we neglect to account for the less tangible aspects of digitization that have real, measurable impacts on the economy. The solution, it seems, must lie somewhere between extremes.

Measuring the digital economy is challenging

To discover the proper method to measure the digital economy, we must address three specific challenges.

The digital economy's role in GDP

More companies operate online today than ever before. That is obvious. However, the average digital company's contribution to the GDP has fallen in recent years despite the continued dominance of companies like Facebook and Google.

The core services of social media companies and search sites are free for all users. How, then, should an economy include such transactions that have such a profound effect on modern life? Facebook's activity alone could have raised the US growth rate from 1.83% to 1.91% between 2003–2017. No one ever intended for GDP to calculate the intangible values of free transactions, but with such massive changes to the definition of value in the past 20 years, that needs to change.

Most countries already adjust economic measurements for technological changes by inflating or deflating by affected products and services. Different countries approach this in different ways, though. Without a unified standard, comparing one economy to another will become an increasingly difficult challenge.

Capturing activity in relation to location and boundaries

When someone makes a physical product, that product exists at specific geographical points. Digital processes are not so convenient.

Digital production frequently crosses numerous borders. So do pieces of cars and other products, but with digital, the specifics are far less clear. If we hope to get an accurate reading on the digital economy, we need data that can score and rank digital assets and processes and assign those digital values to specific, consistent owners.

Solving this challenge will unlock companies' digital power and share that information with everyone who has an interest. The larger the digital space grows, the more necessary the measurement of individual contributions in that space will become.

Predicting growth and sales

What good is data if it does not tell us something about the future? As more companies expand their online presence, the economic impact will expand alongside them.

In my line of work, I have seen a very clear trend: Businesses with higher digital growth sell more products and services. That information alone is valuable, but as any long-time businessperson knows, not all growth is created equal. We must have accurate, universal standards by which to measure online growth (and, by extension, real economic impact) if we wish to gain the predictive information we need.

We should not deprioritize the fastest-growing sector of the economy just because measuring it might be inconvenient. Accurate data on digital economics empowers stakeholders of all stripes to make better decisions. Smarter economic measurements would also boost confidence in the market, facilitating growth as we gain a better understanding of what, specifically, is growing. To achieve those results, however, we must first treat the challenges outlined here with the respect and urgency they deserve.

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