Net Impact - Productivity Overview

Productivity and Net Impact Overview

  "Standard of living" as ultimate measure of impact
  Few studies have examined Internet's economic impact
  Internet benefits accrue to entire economies

"Standard of living" as the ultimate measure of impact
That the Internet has had a substantial impact on the way business is conducted is incontrovertible. However, the extent to which information technologies have contributed to substantial cost savings and profitability increases in businesses has not been measured beyond the macro-data level.

A useful, and ultimately the most important, measure of the Internet's overall impact is the extent to which it enhances the standard of living of all those who use it. This is the way that the impact of other important innovations—such as the automobile and electricity—is judged, and the Internet is and should be no different.
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Few studies have examined the Internet's full economic impact
Since the Internet is such a recent phenomenon, it is not surprising that relatively few studies so far have examined its likely economic impact. By and large, these studies have relied on anecdotes and limited survey evidence, and quickly become outdated. Nonetheless, the consensus seems to be that the Internet, at a minimum, could generate added productivity growth of at least .5 percent annually.

How much of an economic transformation is the Internet likely to produce in the global economy? This is the main question this study seeks to answer. It is an important question because of the impact the Internet will have on individuals, businesses, and the entire global economy.
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Internet benefits accrue to entire economies
The benefits of the Internet accrue to entire economies. As more firms use the Internet to cut costs, the growth rate of productivity for the whole economy will improve. Faster productivity growth improves living standards for average citizens in several ways:

Through more rapid growth in real wages (which ultimately reflect productivity),
Slower inflation (which also enhances real wages), and
Through larger government surpluses, which leave room for tax cuts and/or added spending on social programs that improve quality of life

The last point underscores the importance of productivity growth for economic policy making. For those who set governmental budget policy, projections of productivity growth are the most critical-albeit the most uncertain-element in long-range budget forecasting.

Nonetheless, in principle, there are several reasons for believing that the Internet will in fact lead to productivity enhancements. At bottom, the Internet represents a new and highly powerful way to communicate information more rapidly, cheaply, and with greater flexibility. This should allow firms:

To reduce their transaction costs of locating and purchasing required supplies (including labor);
To enhance the efficiency of producing and delivering goods and services (through lower inventories and through enhanced cooperation among designers of new products and services in different locations, whether inside or outside the firm)
To reduce the cost and improve the effectiveness of dealing with customers

In addition, to the extent that the Internet promotes transparency, it should enhance competition in many (but not necessarily all) markets. Thus, this should intensify pressures on firms to adopt the cost-saving improvements facilitated by the Internet.