Comparison of deflators for the production of telecommunications services

The telecommunications services industry has seen significant technological advancements, but industry output statistics do not reflect this. Between 2010 and 2017, data usage in the UK increased by almost 2,300%, but the sector’s real gross value added fell by 8% between 2010 and 2016, while the sector experienced a the lowest productivity growth rates on record. The apparent disconnect between rapid technological improvements and the measured economic performance of industry can largely be resolved by strengthening the deflators applied to nominal output. The authors contrast two methodologically distinct options, concluding that the prices of telecommunications services fell by 37% to 96% between 2010 and 2017, considerably more than the current deflator. The sector’s actual output will therefore have been considerably higher than current statistics indicate.

Their contribution in this article has been to show that a significant improvement in the current method of calculating a price index for telecommunications services, taking broadband data services into account, results in an index that has fallen significantly more in recent years than the current index. However, it will still be an upward biased deflator, as it does not sufficiently take into account the increase in consumer utility due to new goods. An alternative unit value methodology inspired by technical improvements and price cuts for data transmission results in an index that declines considerably more. This understates the ‘true’ price of the communication services concerned as it neither reflects consumers’ attributions of value to service features nor attributes such as market structure and price differentiation. It is nevertheless informative on the effectiveness of the service offer.

Improvements in the current price index for telecommunications services, taking into account broadband data services in the two options analyzed, suggest that the real output of telecommunications services will have been significantly underestimated in recent years. As it is an intermediate input into other sectors, there will be repercussions on the sectoral distribution of production, but potentially also on 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 have received no financial support from any company or person for this article or from any company 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.

Sean B. Jackson