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What Impact Will E-Commerce Have on the U.S. Economy?
Federal Reserve Bank of Kansas City - Economic Review, Second Quarter 2004 by Willis, Jonathan L
In recent years, e-commerce has emerged as the fastest growing sector of the U.S. marketplace. Despite the contraction in the high-tech industry during the recent recession, firms have continued to enter and expand their presence in e-commerce, and consumers have increased the number of purchases made online. E-commerce currently represents a very small share of overall commerce, but it is expected to continue to expand rapidly in coming years. As e-commerce grows, so will its impact on the overall economy.
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The primary route by which e-commerce will affect the economy at large is through its impact on productivity and inflation. Businesses and consumers that use e-commerce benefit from a reduction in costs in terms of the time and effort required to search for goods and services and to complete transactions. This reduction in costs results in higher productivity. An even larger increase in economy wide productivity levels may result from productivity gains by firms not engaged in e-commerce as they respond to this new source of competition. Continued expansion of e-commerce may also lead to downward pressure on inflation through greater competition, cost savings, and changes in price-setting behavior of sellers.
Recognizing e-commerce's potential impact on the economy is important for policymakers and forecasters as they project economic activity in the future. As e-commerce expands, it could further the trends in productivity growth and inflation that have been observed in recent years. Productivity growth was low in the 1970s and 1980s before increasing sharply in the second half of the 1990s. Inflation was high in the 1970s and early 1980s before beginning a steady decline. The causes of these well-documented changes, however, are not fully understood by economists. While these developments are partly due to fiscal and monetary policy actions, it is also possible that structural changes in the economy played a role. Increased e-commerce activity represents a structural change that could result in downward pressure on inflation over the next decade and, if not offset by monetary policymakers, could lead to disinflation.
This article examines the economic factors that have contributed to the rapid growth of e-commerce and assesses how the future growth of e-commerce may affect the overall economy. Section I of the article describes the size and growth of e-commerce. Section II examines the factors that have contributed to its strong growth in recent years. Section III assesses implications of continued expansion of e-commerce for productivity growth and inflation. The article concludes that if ecommerce continues to grow rapidly, it could lead to an increase in productivity growth and downward inflationary pressure that persist for several years.
I. THE SIZE AND GROWTH OF E-COMMERCE
Over the past decade, e-commerce has increasingly provided an alternative way for buyers and sellers to transact. The term e-commerce, which is short for electronic commerce, is the act of buying or selling goods, services, or information over an electronic network. Transactions are negotiated electronically and are completed when agreement is reached to transfer ownership of goods or rights to receive services or information for a specified price.
Until recently, analysis of e-commerce has been limited by a lack of data. In 1999, the Census Bureau began requesting data on e-commerce sales in its annual surveys of manufacturers, wholesalers, retailers, and selected services and in its monthly survey of retailers. These surveys provide detailed data on the two primary types of transactions: business-to-consumer, or B2C, and business-to-business, or B2B.
B2C e-commerce
Despite receiving the majority of media attention due to its recent rapid growth, B2C e-commerce represents only a small share of sales. B2C accounted for only 7 percent of e-commerce sales in 2002, the most recent year for which data are available (Department of Commerce 2004a). In terms of overall sales, B2C e-commerce comprised only 1.1 percent of total B2C commerce in 2002 (Chart 1). The growth of B2C e-commerce, however, far outpaced that of non-e-commerce. Between 1999 and 2002, B2C e-commerce grew 29 percent annually, while non-e-commerce grew 4 percent annually (Chart 2).
The development of B2C e-commerce has been fueled by a rapid increase in the number of people shopping on the Internet. First introduced for public use in the late 1980s, the Internet has quickly expanded from a network primarily used for e-mail communication into a place to engage in a wide variety of activities, including online shopping. As a result, the fraction of households with Internet access increased from less than 20 percent in 1997 to over 50 percent in 2001 (Department of Commerce 2002). Accompanying this surge in Internet usage, the percentage of individuals who made online purchases in recent years has also increased. Commerce Department surveys taken in 2000 and 2001 show that the number of people shopping online increased from 13 percent to 21 percent.
