Digital Economy

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Digital Economy? 

A digital economy refers to the transformation of everyday economic activities, thus becoming digitalized and increasingly dependent on the internet. Online systems and establishments replace traditional brick-and-mortar structures. Information and communication technology is the backbone of a digitalized economy. And the internet, fueled by hyperconnectivity, is its most important part.

Digital Economy

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The digital economy doesn’t solely imply technological developments in commercial transactions or business. In such an economy, widespread digital transformation takeover many areas and plays a versatile role. For instance, it changes the job market scenario, governance, manufacturing industries, and services like education, health, etc. 

Key Takeaways

  • A digital economy is the digitalization of economic activities, mostly businesses. However, the term is diverse now, and digitalization can be seen in every social and industrial sector.
  • The necessities for the digitalization of an economy are electronic devices, infrastructure, the internet, and, most importantly, regulations governing the economy.
  • Its benefits are more evident in e-commerce, e-governance, cloud computing, communication, e-payment, education, and healthcare.
  • Some important innovations include artificial intelligence, the internet of things, augmented reality, virtual reality, automation, etc.

Digital Economy Explained 

The digital economy can be easily put as a global revolution. But to assume that it was a one-shot revolution would be wrong. The foundation for this economy began centuries ago. The invention of the printing press and the industrial revolutions laid the stepping stones to building a world of global hyperconnectivity.

Though mostly considered the digitalization of economic activities, it is much more than that. It is versatile and pervasive to the extent that every sector can digitalize. It has numerous advantages, and it can be promising when employed responsibly.

But balance is important. Too much of anything can be dangerous, and digitalization is one such thing that can potentially threaten humanity. It can lead to job losses and affect mental health in many ways. Therefore, technology or digitalization must only be an aid to humans and not a replacement. Hence, the government should implement a digital economy strategy to strike the correct balance.

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Characteristics 

Here are the main characteristics of a typical digital economy:

  1. Connectivity – The Internet and other communication systems scale up the connectivity factor. But not just communication; the internet also connects different players like people, businesses, and governments. 
  2. Mobility – Mobility refers to the fluidity of operating using a digital device. It can be carried anywhere, operated from anywhere, provided data is available. Additionally, mobility makes the digital economy flexible and highly responsive.
  3. Personalization – Gone are the one-for-all traditional systems. This is the era of personalized experiences and needs for each individual. It enhances the user experience by increasing navigability and accessibility.
  4. Network effect – The ability to ‘share’ is one of the digital economy’s most significant features. People can share anything online – from their favorite videos to their shopping cart to a location to important news.
  5. Free content – This feature of the digital economy is what allows access to almost every content online. Nothing comes for free, but it is all an exchange, such as advertisements for free published content.
  6. Ubiquity – The digital economy extends to every corner where data is present. A person in the U.S. can view an article published in Australia. Thus, the internet allows one to cross borders at a low cost.

Components 

Let’s analyze the important constituents of a digital economy.

  • Electronic devices – These are the underlying basis for applying newer digital innovations. For example, adding the internet to mobile phones and TV, artificial intelligence (AI) to vehicles, and the internet of things (IoT) to watches make them smart.
  • Internet – Though a disruptive technology once, the internet has further paved the way for many other innovations. Cloud computing, video conferencing, etc., are a few examples.
  • E-commerce – E-commerce is one of the major activities that take place online. There are so many online businesses – big and small, and so many choices. Nowadays, anything can be bought and sold in any part of the world.
  • Social media – Like e-commerce, social media is a major constituent of the digital economy. It is used mainly as a communication media and as an auxiliary for e-commerce.
  • Artificial intelligence (AI) – Currently, AI is bringing about major transformations, most of which are unimaginable, even as they are happening. Some examples are the auto-pilot car and smartwatch that can calculate the calories burnt, pulse and heartbeat, etc. 
  • Cloud computing – Cloud computing allows for the online storage of data, like documents, passwords, payment information, etc. It eradicates the need for physical storage devices like USBs, CDs, etc. It also brings billions of dollars to firms offering cloud storage services. However, cloud computing has some environmental and security concerns.

Examples 

Let us consider the examples given below for a better idea:

Example #1

The corporate world has a few examples of those players who rely solely on the internet to run their businesses. Consider the vacation rental company Airbnb. It brings together customers online and acts as a virtual marketplace where customers can be buyers and sellers. Another example is the online streaming platform Netflix. It has a lot of content to stream and charges a subscription fee. It also allows people to watch movies or series with friends worldwide.

Example #2

Here’s recent news about the digital economy of India. India is probably one of the most important examples of an economy that has faced rapid digital transformations recently. According to the latest news published by Reuters, the Finance Minister of India, Nirmala Sitharaman, believes this digital revolution can offer new investment opportunities for the United States.

The advancement of digital commerce in the country has benefitted the manufacturing sector and, thus, the American companies which have set up factories in India. She also said the government works with foreign investors to ease investment regulations.

Impact 

The impact of the digital economy can be seen everywhere. An average human being’s day seldom moves without technology and the internet. Many traditional systems have become digitalized. Everyone has mobile phones that have all-around features that work with the help of the internet. Televisions, vehicles, and even homes have become smart. 

Especially, AI and the IoT are currently playing a revolutionary role. Its impact can be seen in healthcare (pacemakers, smart watches) and security systems (sensors, alarms). Similarly, digitalization has transformed education too. Even online businesses are engaged in offering specific courses to people.

E-commerce is undeniably made a great leap in recent years. It has proved important, especially in the time of the pandemic. People buy everything from electronic devices to groceries and medicines online. This has been facilitated to a great extent by online payment systems, location services, etc.

And, of course, digital governance is an important advancement. For example, citizens of most countries can now avail of government services online, which doesn’t just speed up the process but allows online payment, tracking progress, etc.

Thus, it is possible to identify the trace of digitalization and technology almost everywhere in this digital era. People have accepted it for the greater benefits it can offer to them.

Pros And Cons 

Let’s weigh the pros and cons of a digital economy.

ProsCons
Saves time through faster response and real-time functioning.Privacy issues and security concerns.
Cost-effective for customers, as it provides the option to work without moving and offers greater choices.The probability of fraudulent activities is high.
Reduces overheads for businesses or service providers.This can lead to job losses owing to automation and online commercial activities.
High flexibility and accessibility (24×7 operations).Over-indulgence in technology can be harmful.
Personalization and customization.Loss of social element and identity.

Digital Economy vs Traditional Economy

A sufficiently digitalized economy sure has its edge over the traditional economy. First, however, let’s examine the key differences between the two.

Digital economyTraditional economy
Goods and services can be bought online and availed at home.Goods and services are availed at brick-and-mortar stores and institutions.
Cashless payment and cryptocurrencies are gaining prominence.Currency/ legal tender is the only mode of payment.
Increasing mechanization and automation.Reliant of the human workforce.
Physical and virtual assets are equally important.Importance of physical assets.
Backed by information and data.Closed communities/ societies.
Digital storage options for users.Physical storage options.

Frequently Asked Questions (FAQs)

1. How should we measure the digital economy?

Digital survey techniques are a great way to understand the digital consumption of people and how they contribute to the GDP. Thus it is possible to make measurements of digital goods consumption, which are otherwise difficult to quantify compared to consumption in a traditional economy.

2. What are some examples of the digital economy?

The digital economy includes e-commerce, e-marketplaces, online educational courses, streaming platforms, social media, video conferencing, work-from-home options, e-health, etc.

3. Why is the digital economy important?

The world is moving at a faster pace. The global village now houses almost eight billion villagers; keeping them all connected is a herculean task. A digital economy is a tool that can achieve this. It increases connectivity, enables mobility, and is ubiquitous. It has the potential to revive and support many industries and sectors. It increases responsiveness, is flexible, and can speed up the pace of economic activities.

This article has been a guide to what is Digital Economy & its meaning. We explain its characteristics, components, pros and cons, and comparison with the traditional economy. You can learn more about it from the following articles –

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