Think Imports and Trade Deficits Impact GDP? Think Again!

Contrary to widespread belief, imports do not subtract from GDP despite the fact that imports are part of the equation.

Let's start with the definition.

GDP = C + I + G + (X – M)

  • C = Personal Consumption Expenditures
  • I = Gross Private Investment
  • G = Government Spending
  • X = Exports
  • M = Imports

GDP Components

Wait a second. It says right there that imports are subtracted. Yes it does, but it is a mirage.

Gross Domestic Product

GDP stands for Gross Domestic Product. Gross domestic product (GDP) is the total market value, expressed in dollars, of all final goods and services produced in an economy in a given year.

The key word is "domestic".

Imports are not domestic. Shouldn't they be subtracted?

The answer is only if they were incorrectly totaled in the first place.

Correcting Misconceptions

The St. Louis Fed discussed this today in How Do Imports Affect GDP?

> When the Bureau of Economic Analysis (BEA) measures economic output, it categorizes spending with the National Income and Product Accounts (NIPA). Some of this spending, which is counted as C, I, and G, is spent on imported goods. As such, the value of imports must be subtracted to ensure that only spending on domestic goods is measured in GDP. For example, $30,000 spent on an imported car is counted as a personal consumption expenditure (C), but then the $30,000 is subtracted as an import (M) to ensure that only the value of domestic production is counted.

> As such, the imports variable (M) functions as an accounting variable rather than an expenditure variable. To be clear, the purchase of domestic goods and services increases GDP because it increases domestic production, but the purchase of imported goods and services has no direct impact on GDP.

Controversial Political Issue

In the Introduction to its article, the St. Louis Fed stated: "International trade is measured as part of GDP and is a large and growing component of our nation's economy. It's also an important, but controversial, political issue. However, the current textbook and classroom treatment of how international trade is measured as part of GDP can lead to misconceptions if not properly explained."

What If?

I can hear you thinking. "Wait a second, what if we did not have imports? Wouldn't domestic production be higher?"

In general, no.

For example: It would take a lot of effort for the US to be self-sufficient in growing bananas. I am sure it could be forced via tariffs, but at what cost?

US bananas would undoubtedly be more expensive than bananas from some place where they grow better. Money spent on bananas would be money not spent on something else.

Consumers would pay more for bananas than they are really worth on the global market. Only a fool (or a subsidized US banana grower) would think such tariffs are a good thing.

Take titanium. Most of the world's Titanium Supply is from China, Russia, and Japan. The US isn't even on the list. We cannot produce enough titanium in the US no matter what the tariff.

Winning vs Losing

Trump's myopic view of trade is that someone "wins" and someone "loses".

In reality, deals are not made unless both sides think they gain.

What about subsidies?

If China is indeed dumping steel, solar panels, anything, it is at the expense of China and for the benefit of US consumers and importers.

If a deal benefits us consumers and corporations then it is a good deal. Period.

Excellent Trade

In essence, for every alleged "dumped" good, we hand over clearly depreciating dollars and get foreign-subsidized materials in return.

It is idiotic to complain about this, but Trump does.

The Enabler

Q. What enabled this setup?

A. Nixon closed the gold window in 1971. Shortly thereafter, deficit spending exploded across the board.

Instead of blaming NAFTA, China, Obama, and everyone else for allegedly bad deals, It would behoove Trump to really understand what's going on.

Trump is clueless and so is everyone else who thinks Trump's trade wars are "winnable".

For further discussion, please see Disputing Trump’s NAFTA “Catastrophe” with Pictures: What’s the True Source of Trade Imbalances?

Mike "Mish" Shedlock

Comments
No. 1-10
ML1
ML1

Freedom to do whatever they want with no consequences has been given to bankers and the solution is malinvestments galore and totally distorted economy where profits, consumer demand, jobs, taxes, markets, invesments are dependent on an ever increasing debt bubble that can never be repaid because to get the profits now the productive capacity of economy was destroyed, production was offshored and economy became rent-seeking, speculation and debt induced false demand while the ability to pay the debts by consumers, companies, states, cities and federal government was destroyed.

Freedom to do whatever they want with no consequences was given to employers trying to steal from the economy by employing illegal immigrants and paying low wages to get more profit for company owners while bankers and Fed and debt crazy politicians kept the consumer demand up with ever increasing debts.

There has been too much freedom.

There should be some consequences and less freedom. In 2008 thousands of bankers should have lost everything they owned and been sentenced to tens of years in prison.

New generation of bankers would have learned to NOT do the stuff that happened in 2002-2008.

Instead they got a slap on the wrist with a feather and raises and bonuses paid by TARP money and Fed goosing banks by crashing rates abnormally low to create more malinvestment and create an economy that is even more addled and distorted by debt. The bankers who had created the mess stayed at the top and told the new generation of bankers how it is done because they were the heroes who made hundreds of millions out of NOTHING and now another bubble has been built...

Every employer who employs illegal immigrants should get a 1 million dollar fine for every illegal employed so if a slaughterhouse or meat processing plant employs 100 illegals the owners should be fined 100 million dollars so they would lose EVERYTHING. Within 24 hours all companies employing illegals would have FIRED them in the state and one example in every state and the jobs magnet would have been completely shut.

Trump promised mandatory e-Verify but since Trump got elected he DELETED his immigration promises from his website and NOTHING has been done to get mandatory e-Verify. Sessions runs a couple raids every month somewhere in USA to make it seem like something is being done but it is just to fool the voters.

Sessions is either a clueless Bambi handled by Koch Brothers funded Republican snakes in Trump administration or Sessions is himself intent on sabotaging Trump's election promises on immigration...

Casual_Observer
Casual_Observer

The rising tide has lifted all boats. When the tide recedes what will left is not much of anything. I suspect the next time down wont have much of a recovery. The 2020s will be the decade of deflation.

ML1
ML1

In the trade example you gave of Bananas it is clear that there is NO point in growing them in USA and if we would grow them in USA they would be more expensive and take the money used in high priced bananas away from other consumption.

However the model does not work when taking into account manufacturing products since there is NO advantage for producing iPhones in China to US consumers since Apple and other manufacturers of tech charge the maximum amount they can get from iPhones and other tech while optimizing the total profit (highest profit per product times the optimum amount of product sold for maximum total profit) and the only ones profiting are Apple stock holders and apple executives and other tech company owners and executives (higher profits lead to higher stock price and higher option profits and executive compensation).

If IPhones would be produced in USA the product price would be about the same but the profit margin for Apple would be about 20% less so stock prices and executive compensation would be lower.

However the real problem is the fact that the whole economic model in USA and Europe that is based on debt consumption is broken.

The current economic model where USA and Europe consume with ever increasing debts for consumers, companies, states, cities and countries while the consumption is kept up with debt, debt, debt is unsustainable and this debt consumption model is enabled by Fed, ECB and banks loaning against ever more higher priced collateral which is priced so high due to the continually expanding debt bubble that keeps prices rising while the tax revenue is increased by this debt based consumption but still politicians at all levels consume much more than they get via taxes and the continual debt increase is enabled by Fed and banks buying government debt to keep it all going.

The only chance to return to something normal is to STOP the current offshoring of production and bring more production to USA and Europe AND slowing the debt increases by governments and consumers so there would be some reasonability in the economic model.

The profit boost from offshoring of production and lowering of working class wages (no real wage growth since end of 1970's and wage crash increasing since 1990's with drywall installers dropping from 25 dollars an hour to 10-15 dollars an hour and same for landscaping, cleaning, restaurants etc.) by importation of tens of millions of illegals and millions and millions of legal low wage immigrants should have crashed the consumption and therefore the profits of companies but consumption has been kept up by bubbles in everything and continued increases of debts and the economy destroying caused by offshoring of production and massive immigration has been hidden under mountains of debt.

However the trouble with what Trump is trying to do is that it will crash the markets when the profit margin gets smaller for companies. This will in turn crash the retirement savings of many for the current time and make the calculations on what is needed on future investment returns to fund pensions be really, really unattainable instead of the current situation where they are out of whack.

Also the debt increases at every level need to be slowed down but this will slow the GDP growth and lead to GDP crash leading to the mother, father and uncle of all recessions/depressions at some time and crash the values of Real Estate and the slowing and cutbacks of debt enabled spending by cities, states and governments will lead to the need to shrink government at all levels and cut it back by a lot .

The biggest mirage is that there would be some need for immigration of low wage workers or immigration of any kind of workers. When the excesses in debt and debt based consumption at all levels will be taken out of economy this will lead to less high paid real estate salesmen buying BMW's and less consumption in economy in general at all levels with the most high wage professions losing the most and cutbacks in the number of employers by cities, states and federal government (there can be less need in cutting back the numbers of workers if the wages and benefits for those employed by cities, states and government will be cut to the same level as they are in private sector.) and also massive cuts in employment by private employers since consumption will drop and all of this will lead to a spiral of GDP decreases.

Also the level of what is the price where Apple will be able to sell the best amount of iPhones for max total profits will be ratcheted down since the debt based consumption will be cut back by a lot while economy gets smaller so the Apple stock price is NOT just overpriced by the 20% unsustainable increase in Apple's profit margin enabled by offshoring of production to China but Apple's stock price is overpriced also because of all of the debt based consumption excess in the economy since without the debt increases the optimum sales price would be lower and therefore Apple profit margins would be cut by much more if the debt based consumption is stopped.

Most likely all politicians are too stupid to realize what is the situation since they have kept worsening the situation for years and years but at least part of the bankers should be intelligent enough to realize the situation but fixing the situation would crash their wages, options and other compensation and also crash the value of their real estate and stop their excess consumption so the craziness will continue until it is forced to stop.

What is the debt crash spiral starting point that will once started destroy stocks, tax revenues, consumption, retirements, government services, real estate values, executive compensation, many banks, high wages for educated professionals etc. etc.?

Nobody knows but there is one....

sunny129
sunny129

When the price of the 'capital' was artificially (insane credit expansion!) lowered (ZRP) by Fed (+CBers) for nearly 10 yrs, since '09, who took the best advantage of that ?

CAPITAL (mobile +globalists) or the USA wage worker in the main street?

Same is the one of the major root causes of increase in inequality in INCOME & WEALTH, among the bottom 90% since 2000!

Charges H Smith (of oftwominds.com) is one of the very bloggers out there pointing this hypocrisy of ignoring the ongoing struggle between CAPITAl (mobile) vs US wage worker - the real issue, since '09!

sunny129
sunny129

What's good for the'CONSUMERS' is NOT necessarily GOOD for the average wage worker whose income/wage growth is virtually stagnant?

The consumer in the top 10% has the advantage of both their 'mobile' capital' (exploiting labor via global arbitrage) and also 'cheap' IMPORTS in the name 'free' global trade! The consumer in the bottom 90% has NO SUCH advantage!

The guy who is getting STUCK is the average Joe/Jane in the main street, majority among the bottom 90%! Rest of the arguments is hogwas and trying to deflect the real issue - Capital vs Labor!

Stories