This research aims to estimate the value of free digital goods within the national income accounting framework. Specifically, our goal is the measure the value of final consumption received by households from the consumption of these products. As our measurement strategy, we employ the price of related goods, which, in this case is the price of their premium versions, as a proxy for the value of their free counterparts. The approach allows for consistency with the accounting principles of the SNA and how output from other non-market activities is estimated.
This study contributes to empirical literature quantifying the economic contribution of free digital goods. Expands on valuation methodologies, using market substitutes to address limitations of other approaches. It also provides external validity by comparing estimates with contingent valuation studies and other GDP impact estimates.
Free digital goods lack explicit representation in official statistics despite their significant impact on people’s lives. This is because National Income Accounts mostly focus on goods and services with market value (with a few exceptions), while free digital goods offer utility without a corresponding entry to the household consumption side of the National Accounts.
The slowdown in productivity following the financial crisis, despite the various benefits from rapid digitization, represents a paradox which forces economists and policy makers to rethink how we are measuring macroeconomic aggregates. Perhaps statistical agencies are not measuring all the output from the digital economy because they are outside the production boundary of the System of National Accounts.
We employ the prices of “premium” or paid internet goods as a proxy for the value from their free counterparts. For instance, we use the price of paid versions of Zoom as a source of valuation for its free version. This is common approach to non-market valuation in the National Accounts. Compilers of National Accounts statistics often use market substitutes to impute the value of certain non-market goods, such as services from owner-occupied housing, barter transactions, extraction of groundwater, and agricultural products for own consumption, among others. Compilers of the Household Satellite Accounts also use this strategy to value household services such as childcare. As such, valuation based on this strategy is fully consistent with the SNA’s accounting framework.
We also use hedonic regression in order to extract the value of the free component from these goods and untangle them from the value of the premium-exclusive component. Hedonic regression is an econometric approach wherein the price of a good is expressed as a function of its characteristics[1],with the goal of estimating the price, or willingness to pay for the set of “characteristics” included in the specification.
Our estimates show that in 2020, the aggregate gross value derived by households from the consumption of the three forms of digital services was between £7 billion to £25.4 billion. This is around s 1.1 to 2 percent of the UK’s household final consumption. We also observe that the value derived by households from consuming these goods is growing much faster than aggregate household consumption. For context, the lower limit of our estimates is already 30 percent of the total final consumption expenditures for communications, which is at £28.6 billion. Meanwhile, the upper limit almost exceeds the value of the same expenditure item.
Our estimates show that in 2020, the initial year of the COVID pandemic, the real household final consumption decline would have been 0.07 to 0.13 percentage points slower had the value of the three digital goods been incorporated in the estimates. This tells us that the availability of free internet services was partially able to reduce welfare loss as a result of the lockdown.
We recommend that statistical agencies explore the development of comprehensive satellite accounts to cover the value of free digital products. This approach would enable policymakers to gain insights into the potential susceptibility of households to supply disruptions associated with these products.
Our study illustrates that even the limited scope of the three digital products examined significantly impacts household welfare, as indicated by consumption expenditures. Extending this analysis to a broader range of goods is likely to underscore the greater role digital products play in household consumption, highlighting the reliance on services from companies with the ability to withdraw such services at their discretion.
[1] In this context, characteristics are features that describe the good. For cell phones, they can be RAM, storage space, camera quality, etc.
Author: John Lourenze Poquiz
