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The Digital Economy and Productivity (2022-038)
David M. Byrne

Abstract: After reviewing the state of digitalization—the use of digital information technology (IT) throughout the economy—we consider the slippery concept of a distinct digital economy and efforts to record it in national accounts. We then anchor the digital economy in a growth accounting framework, augmenting the conventional measure of the IT contribution to productivity—innovation in the production of IT capital plus labor-saving use of IT throughout the economy—with the contribution from the digital platforms that help users navigate the sprawling information landscape. We discuss the difficult measurement issues that thwart full accounting of the scope and productivity of the digital economy. These include quantifying the intangible assets created by platforms and their users, measuring the consumption of intangible services provided by platforms—often for free—and identifying platforms within the existing statistical system, which does not treat their activity as a distinct industry.

This paper will appear as a chapter in a forthcoming book to be published by the Brookings Institution from the Hutchins Center on Fiscal and Monetary Policy’s Productivity Measurement Initiative.
In this chapter, we consider three closely related but distinct questions: (1) How digitalized is the economy? (2) What are the boundaries of the digital economy (and how big is it)? (3) And, how much does the digital economy contribute to economic growth? We first describe the state of digitalization and its distinctive features in recent years, namely radical mobility, cloud computing, and digital platforms. Then, after describing emerging efforts to measure the digital economy in national accounts, we anchor the digital economy in a growth accounting framework and discuss obstacles to assessing the role of the digital economy in productivity. We argue that accounting for three distinct phenomena—the production of IT capital, its use throughout the economy, and the economic activity of digital platforms—is necessary to measure the contribution of the digital economy to productivity. Many thorny measurement problems stand in the way of that effort.

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