Supplementing GDP to Account for Innovation-Driven Gains in Consumer Well-Being

The Information Age, which began with the introduction of personal computers in the late 1970s, underwent a further dramatic transformation following the popularization of the Internet in the early 1990s. Since then, the expansion of mobile communication devices to include smartphones has led to an explosion of easily accessible "free" information that allows for more efficient consumer choice.¹ Rapid progress in science, widely available costless information, and many new and better-quality consumer goods have led to advances across economic sectors, from health care and higher education to finance and banking. For instance, technologies that allow traditional surgeries to be replaced by minimally invasive ones have improved health outcomes without significantly impacting health care costs. In general, many innovations improve consumer well-being without a monetary metric to record their extent, or even their presence. As a result, their benefits are not fully included in gross domestic product (GDP).

In their working paper "Expanded GDP for Welfare Measurement in the 21st Century" (2020), Hulten and Nakamura propose an extended framework to capture the benefits that accrue directly to consumers outside the traditional marketplace by incorporating "utility-augmenting" innovation.² Their expanded GDP (EGDP) framework accounts for the monetary value of innovation-driven benefits by estimating what consumers would be willing to pay for free goods obtained from the Internet if they were required to do so. The fact that consumers are not required to pay does not mean that no value exists. Consider information goods such as Wikipedia, Google search, and Tripadvisor, which are available on the Internet without direct charge. The information provided allows consumers to make more informed decisions and therefore to wring more satisfaction ("utility") from each dollar of their income—or, as Hulten and Nakamura put it, to receive more "bang for the buck" for each buck they have.

Put simply, conventional GDP measures how many bucks are earned in any year and tracks the goods these bucks buy. GDP shows how resources (labor and capital) are transformed into output (goods and services) using available technology. GDP trends reflect how inputs grow and how innovation increases their productivity. Yet, while GDP reflects the production and distribution of goods and services, it does not take into account the innovation that increases the utility of consuming a good. This is where Nakamura and Hulten's EGDP framework adds value: It captures the largely unrecorded benefits of free information associated with innovation. By combining the innovation-augmenting utility metric with GDP, EGDP provides a broader measurement of aggregate economic outcomes. This measurement better captures overall well-being and the standard of living. Since the utility-augmentation metric is developed within the same conceptual framework as conventional GDP, the two can be added together to arrive at EGDP.

This enhanced framework is not intended to replace GDP as the headline indicator of economic activity, but rather to complement it. Both GDP and EGDP provide important insights about the functioning and growth of the aggregate economy and the role played by technology. Conventional GDP and its sectoral components provide invaluable information, helping to guide policy on issues relating to resource utilization over business cycles—issues such as unemployment and the gap between potential and actual GDP (the Okun gap). GDP indicators also enable policymakers to regulate the use of resources and understand the consequences of that use. For example, the growth in inflation-corrected GDP per worker, which is measured by economic transactions, is an important variable for understanding the causes of output growth. EGDP goes a step further by incorporating important measured benefits to consumers resulting from innovation.

By failing to account for these innovation-driven benefits, economists understate the true impact of the technical revolution that has unfolded in recent decades. Based on a review of the empirical literature, Hulten and Nakamura estimate that the monetary benefit of utility-augmentation to consumers is large, possibly $1 trillion or more. Of particular relevance for economic policy, they find that economic welfare can grow faster than conventional GDP during times of rapid innovation.

The authors suggest that EGDP should be reported alongside GDP in the Bureau of Economic Analysis' (BEA's) national accounts. This could be accomplished by recording utility-augmenting effects in an "experimental satellite account," providing a new source of useful macroeconomic data for economists and policymakers. The approach of creating a separate account is appealing because EGDP's research is in its infancy and also lacks a lengthy time series for comparison purposes. In contrast, conventional GDP accounting in the U.S. dates back to the late 1940s and is largely built around observable market-generated data; thus, it tends to be more reliable than the utility-augmentation metrics. The authors note that the BEA has started to make gains in "innovation accounting." This effort would be enhanced by further collaboration between the BEA and the Bureau of Labor Statistics (BLS) to improve the reliability of price statistics that capture and classify product innovation.

The authors expect continued growth of free information and better-quality products in the months and years ahead because of the dynamic nature of the Internet and rapid technological developments.