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How do web-only firms grow to build the digital economy?  Which markets do they operate in? How important is the digital economy?

In macroeconomics there are a number of growth theories:

Classical growth theory: This states the view that the growth of real GDP per person is temporary and will return to subsistence level due to a population explosion.

Neoclassical growth theory: This is the proposition that real GDP per person grows because technological change induces saving and investment which makes physical capital grow. Diminishing returns end growth if technological change stops. It breaks with the classical growth theory by arguing that the opportunity cost of parenting will prohibit a rise in population.

New growth theory: This argues that the economy is a perpetual motion machine driven by the profit motive manifest in the competitive search for and deployment of innovation through discoveries and technological knowledge. Discoveries and knowledge are defined as public goods in that no one can be excluded from using them and people can use them without stopping other’s people’s use. It is argued that knowledge capital does not bring diminishing returns, i.e. it is not the case that the more free knowledge you accumulate, the less productivity is generated.

Within the microeconomics view, there are 4 market types:  perfect competition in which many firms sell an identical product; monopolistic competition in which a large number of firms compete with slightly different products, leading to differentiation; oligopoly where a small number of firms compete; and monopoly in which one firm produces a unique good or service, e.g. utility suppliers.

It has been estimated by The Boston Consulting Group that the proportion of GDP in 2009 earned by the digital economy was 7.2%[1]. They estimate that it will grow to 10% in 2015. They define the elements captured by GDP as: investment, consumption, exports and Government spending.  The total contribution of the internet sector divides into: 60% consumption on consumer e-commerce and consumer spending to access the internet; 40% on Government spending and private investment. They identify elements which contribute indirectly but which are ‘beyond GDP’:  e.g. user-generated content, social networks, business to business e-commerce, online advertising, consumer benefits etc.




[1] The Connected Kngdomw: how the internet is transforming the U.K. economy. The Boston Consulting Group, commissioned by Google, 2010.

Written by Caroline Halcrow on October 29th, 2012

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