On this blog and elsewhere, I have been arguing, perhaps too often in some people’s perception, that presenting imports as a “deduction from GDP” is a gross accounting error. See for example my October 30, 2017 post “Misleading Bureaucratese.” (I also touch on the issue in my new book, What’s Wrong with Protectionism.) This elementary error is everywhere and very frustrating, even if the national statisticians at the Bureau of Economic Analysis and any economist cognizant with the national accounts know it is an error.
In the September 4 issue of the St. Louis Fed’s Page One Economics, staff economist Scott Wolla has a neat, clear, short article that explains the error. It is worth reading the whole article, titled “How Do Imports Affect GDP?“, but its main points are the following (emphasis in original):
Imports do not add to or subtract from GDP, even though the equation reads GDP = C + I + G + (X – M). …
GDP measures domestic production, so imports (foreign production) should have no impact on GDP. …
The expenditure equation seems to imply that imports reduce economic output. For example, in nearly every quarter since 1976, net exports (X – M) have been negative … , which seems to imply that trade reduces domestic output and growth. This can influence people’s perspective on trade. This essay explains that the imports variable (M) corrects for the value of imports that have already been counted as personal consumption (C), gross private investment (I), or government purchases (G). And remember, the purchase of domestic goods and services should increase GDP, but the purchase of imported goods and services should have no direct impact on GDP.
In general, the St. Louis Fed provides very useful research and publications, besides its remarkably user-friendly FRED database. Wolla’s explanation of the misuse of the GDP expenditure equation is another contribution to economic education.
In the Fall issue of Regulation, which had already gone to press when Wolla’s article appeared, I will once gain address the GDP-import error while analyzing the arguments of Peter Navarro, an economist who should know better even if he is now in the White House. For many years, in fact, Navarro has been a vocal seller of this economic snake oil.
READER COMMENTS
T Boyle
Sep 6 2018 at 10:06am
A more consumer-friendly way to write the equation might be
C + I = GDP – G – X + M
Because, in the end, Consumption and Investment are what we want.
And, if you love Government, you can write it as
C + I + G = GDP – X + M
Pierre Lemieux
Sep 6 2018 at 11:41am
I agree with your first point, and have often mentioned that the parentheses are part of the confusion. My upcoming Regulation articles makes the point again. To push your second point, if one really loves government, he can write the identity as
G = GDP – (C+I) – X + M,
but… that would valorize imports and devalorize exports (and everything else)!
BC
Sep 6 2018 at 11:54am
C+I = GDP + (M-X) – G
has a natural interpretation: what we produce plus what foreigners contribute minus what government siphons away equals what we have available to consume now and invest for the future.
BC
Sep 6 2018 at 12:04pm
C + I + G = GDP + (M-X)
Why do economists look at capital share and labor share of income? Doesn’t the equation above suggest we should look at share of goods and services going to consumption, investment, and government?
Ahmed Fares
Sep 6 2018 at 11:40pm
“no direct impact on GDP”
If an American buys an American toaster for $40, US consumption, and by extension GDP, rises by $40. If an American buys a Chinese toaster for $40, US consumption rises by $40, which is then netted out of US GDP, leaving US GDP unchanged.
So that would mean imports have an indirect impact on GDP ($40 in this example).
Now I’m not forgetting that US imports put US dollars in the hands of foreigners, which can lead to US exports or a surplus on the US capital account, etc., but the first-order effects do seem to indicate that imports do have an indirect impact on GDP, which is what really matters.
In other words, the problem is not that imports caused US GDP to fall, when GDP actually remained the same, but rather that they didn’t allow US GDP to rise.
Pierre Lemieux
Sep 9 2018 at 12:34pm
Ahmed: Of course, you are right to say that a non-increase of $40 is equivalent to a decrease of $40. It’s the concept of opportunity cost: what you fail to gain is a cost. However, this works differently here than what you suggest.
Recall that the accounting identity GDP = C + I + G + (X – M) gives the expenditure side of GDP, that is, it tells us how GDP (which is production) is distributed among domestic consumers, investors, and government, plus foreign importers.
If the $40 toaster is imported, the $40 is not netted of GDP, although the right-hand side of the accounting identity, taken by itself, might suggest this. What happens is the following. The $40 of domestic resources that would have been used to manufacture the toaster are presumably used instead to, say, code a piece of software (software developers working in the building that would have been used to manufacture toasters, etc.). So nothing is changed in GDP or in the accounting identity.
It is true that in order to explain the accounting identity calculated ex-post (to explain any “indirect impact”), economic theory (as opposed to pure accounting) is required. The one you propose assumes that the domestic resources that would have been used to manufacture the (imported) toaster would otherwise remain unemployed or else produce something worth less than $40, thereby reducing GDP. More fruitful, however, is the theory of comparative advantage, which teaches that the $40 of domestic resources used to code the piece of software will produce something worth more than $40, as when the piece of software is exported for $50. GDP will thus have increased by $10 through international specialization and exchange.
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