A comparison of deflators for telecommunications services output

Wireless communication network concept.
Editor's note:

This paper is published as part of the Hutchins Center on Fiscal and Monetary Policy’s Productivity Measurement Initiative

The telecommunications services industry has experienced significant technological progress yet the industry’s output statistics do not reflect this. Between 2010 and 2017, data usage in the UK expanded by nearly 2,300 percent, yet real Gross Value Added for the industry fell by 8 percent between 2010 and 2016, while the sector experienced one of the slowest rates of recorded productivity growth. The apparent disconnect between rapid technological improvements and the measured economic performance of the industry can largely be resolved by strengthening the deflators applied to nominal output. The authors contrast two methodologically distinct options, concluding that telecommunications services prices fell by between 37 percent and 96 percent from 2010 to 2017, considerably more than the current deflator. The real output of the sector will therefore have been considerably higher than indicated by current statistics.

Their contribution in this paper has been to show that a sensible improvement to the current method for calculating a price index for telecommunications services, taking account of broadband data services, results in an index that has declined substantially more in recent years than the current index. However, this will still be an upward-biased deflator, as it does not sufficiently take account of increasing consumer utility due to new goods. An alternative unit value methodology inspired by the engineering improvements and price declines for data transmission results in an index that declines dramatically more. This understates the ‘true’ price of the communications services concerned to the extent it does not reflect either consumer attributions of value for service characteristics or attributes such as market structure and price differentiation. It is nevertheless informative about the supply-side efficiency of the services.

Improvements to the current price index for telecommunications services, taking account of broadband data services in both options analysed suggest that the real output of telecommunications services will have been significantly understated in recent years. As these are an intermediate input into other sectors, there will be consequential implications for the sector distribution of output, but potentially also for real GDP. The authors have focused on telecommunications services, but similar considerations may apply to other service sectors experiencing rapid digital innovations.

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The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. Neither is currently an officer, director, or board member of any organization with an interest in this article.