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[Info] How much is the sharing economy worth to GDP?

Written by Stefan Hall Project Specialist, World Economic Forum
James Pennington Project Specialist, Circular Economy, World Economic Forum

Friday 28 October 2016
Clients of bicycle sharing service Citi Bike and others wait for a traffic light to turn green along Ninth Avenue in Manhattan, New York, U.S., June 15, 2016. REUTERS/Rickey Rogers - RTX2GHDN

Image: REUTERS/Rickey Rogers

If you were to quantify the sharing economy’s value to society, what would you say? In the United States, the social value of Uber last year was equivalent to giving every resident $20, regardless of whether or not they use the service. In its first four years, Airbnb built an inventory of 600,000 rooms; Hilton took about 23 times longer – 93 years (a saving of more than a lifetime).

The sharing economy refers to economic activity centred around online platforms, based on sharing underused assets or services, for free or for a fee, on a peer-to-peer basis. Cars and bedrooms are the most cited examples, but the sharing economy includes everything from household appliances to land use. Typically, rates are set by the technology platform – the software that links supply to demand – as with ride-sharing services, for example. In some instances, providers can set their own prices – such as with holiday rentals or contract work. In the vast majority of cases, the platform takes a cut of the fee. The seller takes home the rest.

When a government calculates the Gross Domestic Product (GDP) of its country, the cost of these exchanges should be included, because GDP is measured as the sum of consumption, investment and government spending (plus exports, minus imports). But there’s a lot of value generated by the sharing economy that is not being fully captured in GDP numbers.

Image: Credit Suisse

Here are four measures of value in the sharing economy that are not fully accounted for in GDP:

1. Uncounted economic gains

Keynes wrote that “when a man marries his housekeeper, GDP goes down”, referring to the fact that many ‘hidden’ goods and services have a market value. While the insight might be an anachronism, it still tells us something about GDP and how it’s measured – or not. Specifically, it refers to the fact that there is economic activity that contributes to output, but is not counted in GDP. Keynes was talking about household work, such as childcare, gardening and home improvements. These are ‘investments’ that add value, and therefore should contribute to GDP, but they go unrecorded.

The sharing economy produces uncounted economic value in a similar way. Ignoring that there might be some who are not declaring all of their income from sharing platforms, the very nature of the sharing economy means that money is not always exchanged for a good or service. Couch-surfing, for example, is when people stay in other people’s homes while travelling. If this happens for free, there’s an uncounted economic gain taking place.

In theory, this frees up individuals to engage in other parts of the economy. They may use the cash they save to buy other goods, which could boost GDP. In practice, they may just save the money. Either way, there is an economic gain for the individual, even though GDP might not expand. It’s also worth considering that this might accrue in greater proportion to low income consumers, because people are able to consume goods that were previously unaffordable.

2. Better use of environmental resources

The sharing economy has existed a long time – think about lending your neighbour a drill or carpooling. Its rise to prominence has been largely driven by the internet, which enables transaction costs to come down and scale to increase. Technologies such as cloud computing, GPS mapping and social media mean that asset owners are now able to share goods that would otherwise come with significant excess capacity. Cars, for example, are parked 95% of the timeon average. The side effect is that the sharing economy eliminates waste like never before. Instead of your neighbour’s drill, you have access to any household tool you can imagine. Instead of carpooling, there’s a fleet of cars on every corner, available at the push of a button.

It follows that reducing excess capacity will produce an environmental benefit. Fewer resources are required in production: why build another hotel, if you can get people to rent out their rooms? Others have suggested that the sharing economy may prompt consumers to purchase more durable and eco-friendly goods – if they know they can recoup the costs through rentals, they are willing to pay a bit more. Reducing excess capacity is especially important around peak load events, such as the Olympics: cities know they can meet demand at popular times without having to build new infrastructure that would otherwise go underused during ‘normal’ times. GDP doesn’t take into account the environmental impact of consumption or the quality of goods consumed

3. Increased personal well-being

GDP fails to measure social progress, an important indicator of which is wellbeing. It’s difficult to measure well-being, because it extends beyond simple economic measures to include quality of life factors such as social and psychological health. When it comes to the sharing economy, the social components of sharing are not included in calculations of value, but they can contribute hugely to life satisfaction.

Someone who rents a room in their house to a stranger can assign a monetary amount to the transaction, which is reflected in GDP. Similar services allow users to hire locals to learn a skill, show them around an unfamiliar town, or go out to dinner, and the cost of doing so should also show up in GDP figures. But in both these cases, people also derive a social benefit from spending time and interacting with others, and this is not measurable in monetary terms. Individual well-being increases because people simply feel good about sharing, and they enjoy the contact with other people. An economy that has a high amount of social sharing is clearly high in value, but may not be performing as well as traditional economic indicators suggest.

4. Higher option value and consumer surplus

There are two interlinked concepts of value in economics that apply to the sharing economy but cannot be measured by GDP: the option value and consumer surplus.

The option value refers to the value that is placed on people’s willingness to pay to maintain a public asset or service even if there is little or no likelihood of them ever using it. The exact amount people are prepared to pay is based on their uncertainty about the future need for the asset; cost of replacement if it is lost; and non-storability of the asset.

In other words, people are willing to pay to have the ‘option’ to use the product or service at some point, either because they like the safety net it provides (like a cross-city bus service late at night) or because the cost of storing and maintaining it would be too much, or even impossible, on an individual basis (such as a public park). It’s difficult to know what the option value is for sharing economy companies, but arguments exist that it is quite high. Again, this means there is value in the economy that is unaccounted for by GDP.

The second concept is consumer surplus. This is the difference between the price that consumers are willing to pay and the total amount that they actually pay. Part of the consumer surplus is generated by increased supply – more rental accommodation, whether private or commercial, can reduce the average price of a room across the system.

The other part of the surplus comes from making full use of the excess capacity available, as described above. You don’t need more cars to drive down taxi prices if, thanks to ride-sharing, you can increase the number of journeys made with the same cars. A study by the United States’ Transportation Research Board estimates that one shared vehicle replaces at least five privately owned cars. Having fewer ‘wasted’ assets expands supply and drives down prices, which increases both the option value and the consumer surplus. Neither of these value measures is included in GDP.

What to do?

As Diane Coyle has argued: “the sharing economy is blurring the conventional boundary between ‘the economy’ and everyday life; understanding this is vital if governments are to develop policies that enable the economy to grow and people to work and earn as they want to”.

There are clearly benefits that are not captured by GDP alone: wellbeing can improve, the economy can become more efficient, fewer environmental resources are needed, and the overall consumer surplus might go up. But there are also several risks, related to social protection and welfare and corporate tax, most notably. Governments must ensure that everyone benefits from the value created.

Some suggestions for capturing the full extent of the sharing economy include using labour force surveys and big data techniques to get a better sense of the sharing activity people engage in. The European Commission is also undertaking an initiative to include environmental and social aspects in measures of economic progress, and there are several other indices – such as for development and happiness – that attempt to go beyond GDP as the headline descriptor of growth. Ultimately, “statisticians and economists should think more deeply about what is meant by “the economy” in the twenty-first century”. They may find that the new technologies underpinning it could also be used to actually measure it.

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