1 “Information Activities” account for 70 percent of the U.S. Economy! Do you believe it???

2 Two “Recent” Studies U.S. Census Bureau (1997): Information Sector accounts for 4.22 percent of U.S. GNP Michael Bergman (2005): Information contents of U.S. Enterprise documents represents about a third of GDP

3 Measuring the US Information Economy: An Exercise in National Income Accounting* Hiranya K Nath Sam Houston State University October 13, 2005 * Based on Apte, U. and H. Nath, 2004, Size, Structure and Growth of the US Information Economy, BIT Working Paper, UCLA

4 Two major attempts to conceptualize and measure the information economy Fritz Machlup (1962): to conceptualize the ‘knowledge industry’ and to present a comprehensive statistical profile of this industry Marc U Porat (1977): to measure the size and structure of the information economy using the national income accounting (NIA) framework

5 Differences between Machlup and Porat Machlup’s approach requires an overhaul of the conventional NIA framework thus making it hard to place information economy in an overall macro context while Porat’s approach is relatively simple and easy to implement Porat distinguishes between “primary” and “secondary” information sector while Machlup does not make such distinction Machlup uses “final demand” whereas Porat uses “value added” to measure contributions of information economy to GNP

6 Porat’s Concepts and Definitions Information: “data that have been organized and communicated” Operational definition of information activities: all workers, machinery, goods and services that are employed in processing, manipulating and transmitting information

7 Organization of the Economy Economy is made up of two inseparable domains Transformation of matter and energy from one form into another Transformation of information from one pattern into another = Information Economy Primary Information Sector Secondary Information Sector

8 Primary Information Sector (PRIS) goods and services which intrinsically convey information or are directly used in producing, processing or distributing information knowledge production and invention information distribution and communication risk management search and coordination information processing and transmission services information goods selected government activities support facilities wholesale and retail trade in information goods and services

9 Secondary Information Sector (SIS) Information services produced for internal consumption by government and non-information firms Public bureaucracy: planning, coordinating, deciding, monitoring, regulating and evaluating activities Exception 1: Printing, law and accounting in PRIS Exception 2: Education and postal service in PRIS Private bureaucracy: informational cost of providing a non- information good

10 Table 1 Value added contribution of Primary and Secondary Information Sector to GNP in 1967, 1992 and 1997 (Values in millions of current dollars) Sector Primary 200,025 (25.1%) 2,055,950 (33.0%) 2,940,121 (35.2%) Secondary 168,073 (21.1%) 1,427,119 (22.9%) 2,317,419 (27.8%) Information (Total value- added) 368,098 (46.3%) 3,483,069 (55.9%) 5,257,540 (63.0%) Non-Information (Total value- added) 427,290 (53.7%) 2,750,836 (44.1%) 3,088,106 (37.0%) Total GNP 795,388 (100.0%) 6,233,905 (100.0%) 8,345,646 (100.0%)

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13 Measuring Primary Information Sector Use Benchmark Input-Output Tables to identify industries belonging to PRIS at a disaggregate level (6-digit/9-digit level of I-O classification) Take the value added figures at those disaggregate levels Aggregate over 6/9-digit industries to obtain value-added at corresponding 2-digit level 2-digit level industries, such as communications, office, computing and accounting machines, radio, television and communication equipment, and electronic equipment, are identified as belonging entirely to the PRIS.

14 Measuring Secondary Information Sector To measure the non-marketed services of the SIS, Porat uses a rather restrictive definition of value added that includes –(1) employee compensation of information workers –(2) part of proprietors’ income and corporate profits earned for performing informational tasks, and –(3) capital consumption allowances on information machines

15 (1) Employee Compensation of Information Workers Detailed Occupation-Industry matrices of ‘No. of employees’ and ‘Wages and salaries’ are used to calculate employee compensation Industries Occupations No. of employees Occupations Industries Wages and Salaries Industries Occupations Compensation of Information workers

16 (2)Proprietors’ income and corporate profits, and (3) capital consumption allowance Impute the value of proprietors’ income earned for performing informational tasks by matching them with information workers in similar occupations and using their salaries as the value of compensation for proprietors for informational activities Use a matrix that shows the detailed capital flows of all industries to calculate depreciation allowances on information capital goods

17 Problems From the published sources it is difficult to obtain data at disaggregate levels No. of workers and wages/salaries by occupational categories are available for the survey years which may not be the same as those of the I-O tables Calculating SIS value added at aggregate level may lead to double counting as some of the disaggregate industries within a particular aggregate industry may have been entirely counted in PRIS Use of the new NAICS (North America Industrial Classification System) has raised additional issues when you try to make the values comparable to earlier years.

18 How do we handle these problems? See Apte, Uday M. and Hiranya K Nath, 2004, “SIZE, STRUCTURE AND GROWTH OF THE US INFORMATION ECONOMY” BIT Working Paper A Technical Appendix to the paper and detailed Background Tables can be obtained from Hiranya K Nath

19 Critiques of Porat’s Method Although the decomposition of the information economy into PRIS and SIS is conceptually appealing, the methods of measuring them may lead to inconsistency. Furthermore, this method of aggregation may lead to an overstatement of the size of the information economy as it fails to exclude the non-information activities in the PRIS. Every occupation has an informational component. Thus, the identification scheme used by Porat is arbitrary and ad-hoc. Moreover, that new information occupations have been continually emerging the list of information occupations needs to be updated regularly. Porat’s information economy includes very diverse activities whose growth cannot be explained by unitary theory. Also, Porat's concept of information economy does not provide a theory to explain the development of advanced capitalist economy.

20 Suggestions for Improvements A unified approach to both PRIS and SIS: In order to exclude the non-information activities in the PRIS, we would propose that the employee compensation of information workers, part of proprietors’ income earned for performing informational tasks, and capital consumption allowances on information machines in the PRIS be calculated to measure their contribution to value added Now that many of the information-based services are outsourced to contractors or service industries a substantial part of the private bureaucracy enters into the market. It is thus important to reexamine the secondary information sector. The growth of new information-based industries should be studied separately in all their varied dimensions. Furthermore, their linkages with other sectors of the economy should be examined using the input-output matrix. See Apte and Nath (JSEC, 2004) for example!