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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.
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...