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Accounting for Growth in the Age of the Internet: The Importance of Output-Saving Technical Change

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  • Charles Hulten
  • Leonard Nakamura
Abstract
We extend the conventional neoclassical production and growth framework, with its emphasis on total factor productivity as the primary macroeconomic mechanism of innovation, to allow for technical change that affects consumer welfare directly. Our model is based on Lancaster’s “New Approach to Consumer Theory,” in which there is a separate consumption technology that transforms goods, measured at production cost, into utility. This technology can shift over time, allowing consumers to make more efficient use of each dollar of income. This is an output-saving technical change, in contrast to the resource-saving technical change of the TFP residual. The output-saving formulation is a natural way to think about the free information goods available over the Internet, which bypass GDP and go directly to the consumer. It also leads to the concept of expanded GDP (EGDP), the sum of conventional supply-side GDP and a willingness-to-pay metric of the value of output-saving innovation to consumers. This alternative concept of GDP is linked to output-saving technical change and incorporates the value of those technology goods that have eluded the traditional concept. It thus provides a potentially more accurate representation of the economic progress occurring during the digital revolution. One implication of our model is that living standards, as measured by EGDP, can rise at a faster rate than real GDP growth, which may shed light on the question of how the latter can decline in an era of rapid innovation.

Suggested Citation

  • Charles Hulten & Leonard Nakamura, 2017. "Accounting for Growth in the Age of the Internet: The Importance of Output-Saving Technical Change," NBER Working Papers 23315, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23315
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    Cited by:

    1. Charles Hulten & Leonard I. Nakamura, 2020. "Expanded GDP for Welfare Measurement in the 21st Century," NBER Chapters, in: Measuring and Accounting for Innovation in the Twenty-First Century, pages 19-59, National Bureau of Economic Research, Inc.
    2. Leonard Nakamura & Jon Samuels & Rachel Soloveichik, 2017. "Measuring the “Free” Digital Economy within the GDP and Productivity Accounts," Economic Statistics Centre of Excellence (ESCoE) Discussion Papers ESCoE DP-2017-03, Economic Statistics Centre of Excellence (ESCoE).
    3. Diane Coyle & Leonard Nakamura, 2022. "Time Use, Productivity, and Household-centric Measurement of Welfare in the Digital Economy," International Productivity Monitor, Centre for the Study of Living Standards, vol. 42, pages 165-186, Spring.
    4. Alejandra Bellatin & Stephanie Houle, 2021. "Overlooking the online world: Does mismeasurement of the digital economy explain the productivity slowdown?," Staff Analytical Notes 2021-10, Bank of Canada.
    5. Richard Heys & Josh Martin & Walter Mkandawire, 2019. "GDP and Welfare: A spectrum of opportunity," Economic Statistics Centre of Excellence (ESCoE) Discussion Papers ESCoE DP-2019-16, Economic Statistics Centre of Excellence (ESCoE).
    6. David Baqaee & Emmanuel Farhi, 2018. "The Microeconomic Foundations of Aggregate Production Functions," NBER Working Papers 25293, National Bureau of Economic Research, Inc.
    7. Diane Coyle & Leonard I. Nakamura, 2019. "Toward a Framework for Time Use, Welfare, and Household Centric Economic Measurement," Working Papers 19-11, Federal Reserve Bank of Philadelphia.
    8. Bridgman, Benjamin, 2022. "Is Productivity On Vacation? The Impact Of The Digital Economy On The Value Of Leisure," Macroeconomic Dynamics, Cambridge University Press, vol. 26(1), pages 127-148, January.
    9. Bart Los & Marcel P. Timmer, 2020. "Measuring Bilateral Exports of Value Added: A Unified Framework," NBER Chapters, in: Challenges of Globalization in the Measurement of National Accounts, pages 389-421, National Bureau of Economic Research, Inc.
    10. Ian Goldin & Pantelis Koutroumpis & François Lafond & Julian Winkler, 2024. "Why Is Productivity Slowing Down?," Journal of Economic Literature, American Economic Association, vol. 62(1), pages 196-268, March.
    11. Muendler, Marc-Andreas, 2017. "Trade, technology, and prosperity: An account of evidence from a labor-market perspective," WTO Staff Working Papers ERSD-2017-15, World Trade Organization (WTO), Economic Research and Statistics Division.
    12. Diane Coyle & Mark Fabian & Eric Beinhocker & Tim Besley & Margaret Stevens, 2023. "Is it time to reboot welfare economics? Overview," Fiscal Studies, John Wiley & Sons, vol. 44(2), pages 109-121, June.

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    More about this item

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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