Iphones. Ipads. Wikipedia. Google Maps. Yelp. TripAdvisor. New digital devices, applications, and services offer advice and information at every turn. The technology around us changes fast, so we are continually learning how best to use it. This increased pace of learning enhances the satisfaction we gain from what we buy and increases its value to us over time, even though it may cost the same — or less. However, this effect of consumer learning on value makes inflation and output growth more difficult to measure. As a result, current statistics may be undervaluing household purchasing power as well as how much our economy produces, leading us to believe that our living standards are declining when they are not.

This disconnect has implications for policy. Economists are more familiar with how learning makes us better workers by increasing our productivity, typically reflected economywide
in higher inflation-adjusted wages and output per capita. However, how learning makes us better consumers is less likely to be captured by official measures of consumption and output. To the extent that these statistics might be imprecise, economists are liable to be led astray in assessing the economy’s successes and failures, and policymakers may be misled in deciding which actions to adopt.

But how can one measure the impact of consumer learning on the well-being of households? First, we need to explore just how learning affects value. Then we will turn to theories of consumer preferences and behavior that take learning into account. They may point us toward more accurate ways to estimate inflation and output growth than measuring prices directly.

This article appeared in the Third Quarter 2014 edition of Business Review. Download and read the full issue.