The Macroeconomic Impacts of E-Business on the Economy

The Macroeconomic Impacts of E-Business on the Economy

Daniel Heil (Pepperdine University, USA) and James E. Prieger (Pepperdine University, USA)
DOI: 10.4018/978-1-61520-611-7.ch001
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Abstract

The growing use of information and communications technology (ICT) by business—e-business— has a profound impact on the economy. E-business lowers costs and increases the choices available to consumers and firms. These microeconomic changes work their way through the economy and ultimately influence macroeconomic conditions. Overall, e-business benefits the economy in many ways. Nevertheless, not all the effects of e-business on macroeconomic conditions are positive, and some aspects of e-commerce may limit the effectiveness of monetary policy. E-business changes the macroeconomy in several beneficial ways. Some gains are static in nature, arising from the more efficient use of existing resources. For example, increases in productivity increase a nation’s GDP. In addition, by lowering search and transaction costs, e-business unleashes deflationary pressures (Willis, 2004). Other gains are dynamic, altering the path national growth takes. By lowering the cost of transferring and employing knowledge, ICT enables greater R&D and innovation, which is crucial to long-run economic growth.
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Background

At the microeconomic level, e-business increases the productivity of firms and enhances the economic welfare of consumers.1 Use of ICT by business increases productivity and profits by lowering search and transaction costs, enabling greater specialization, and broadening the market for trading goods (Wen, 2004). Through business-to-business (B2B) transactions, firms can connect their inventory systems with each other to order additional product quickly without using much labor in the process (Lucking-Reiley & Spulber, 2001). Business-to-consumer (B2C) e-business expands the marketplace, producing greater competition, lower prices, and broader consumer choice (Willis, 2004; Banham, 2005). Collectively, these reductions in cost and increases in productivity and consumer choice significantly benefit the economy.

The next section explains how e-business affects GDP, national growth, and monetary and fiscal policy. A country’s GDP, which is a measure of total economic output, is a function of its physical and human capital, other resources, and the production processes used to turn inputs into output. The use of ICT by business increases GDP and economic growth by affecting all of these elements. To begin with, the information industry is itself a category in the GDP accounts, making up nearly four percent of US national income in 2008. More important is the way ICT makes other industries more productive. Investment in ICT increases the amount of physical capital, resulting in increased domestic output across the economy. E-business also makes labor and the production process itself more efficient, which will result in long run economic growth.

Key Terms in this Chapter

Seigniorage: The revenue to the issuer of outside currency (the central bank or the government) from expanding the money supply. Seigniorage results directly from the cost of printing currency being less that its face value. The US Federal Reserve also earn seigniorage indirectly through the interest it earns on the securities it holds to cover its liability for issued reserve notes (cash).

E-payment: Electronic payment. Often the term is used narrowly for online payments, but is used here to refer to any payment made using a system involving electronic networks, such as credit and debit cards, and e-money.

GDP: Gross domestic product. A commonly used measure of the value of a nation’s production, GDP is the market value of all the goods and services produced in the country.

Total factor productivity: Productivity growth not explained by increases in inputs such as capital and labor. TFP, as a residual, captures all other factors influencing growth, such as improved uses of the measurable inputs, general technological progress, and changes in policy and institutions.

Fiscal policy: The policy involving government spending and taxation, designed to influence the level of aggregate economic activity.

E-money: Electronic money. A class of prepaid, stored value retail payment mechanisms in which an electronic device in a consumer’s possession stores a record of the funds available to the consumer. Purchases the consumer makes with the device reduce the funds available. In some new forms of e-money, funds are stored centrally in a server, apart from any physical device in the consumer’s possession.

Monetary policy: The policy involving a nation’s monetary authority influencing the money supply and the rate of interest. The goals of monetary policy typically include stable prices, moderate interest rates, and full employment.

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