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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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    References listed on IDEAS

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    Cited by:

    1. 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).
    2. David Baqaee & Emmanuel Farhi, 2018. "The Microeconomic Foundations of Aggregate Production Functions," NBER Working Papers 25293, National Bureau of Economic Research, Inc.
    3. Leonard I. Nakamura & Diane Coyle, 2019. "Toward a Framework for Time Use, Welfare, and Household Centric Economic Measurement," Working Papers 19-11, Federal Reserve Bank of Philadelphia, revised 12 Feb 2019.
    4. Benjamin Bridgman, 2018. "Is Productivity on Vacation? The Impact of the Digital Economy on the Value of Leisure," BEA Working Papers 0148, Bureau of Economic Analysis.
    5. Bart Los & Marcel Timmer, 2018. "Measuring Bilateral Exports of Value Added: A Unified Framework," NBER Chapters, in: The Challenges of Globalization in the Measurement of National Accounts, National Bureau of Economic Research, Inc.
    6. repec:nbr:nberch:13886 is not listed on IDEAS
    7. Charles Hulten & Leonard I. Nakamura, 2019. "Expanded GDP for Welfare Measurement in the 21st Century," NBER Chapters, in: Measuring and Accounting for Innovation in the 21st Century, National Bureau of Economic Research, Inc.
    8. 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.

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    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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