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 (36)
No. 1-10
MorrisWR
MorrisWR

Mish, you listed I = Imports in the list after the equation (you have both investment and imports as I) but have it correct as M in the table after (M = Imports).

ChuckBlack
ChuckBlack

GDP is irrelevant to the Joe Sixpack on Main Street. GDP has been rising for a long time, but real wages are flat. The S&P has gone up incredibly, but real wages are flat. Obviously, all that value is bypassing the majority of Americans and ending up in the hands of a very small minority.

Kinuachdrach
Kinuachdrach

Interesting that academics call it Gross Domestic Production -- but they spend most of their effort measuring Consumption, not Production.

Outside of the realm of over-simplified algebra, we all know that it does not matter how cheap the import is, we have to exchange something we produce for it. In the simplified world of academic theory, we exchange a real good or service of equivalent value. In today's unsustainable world, we exchange IOUs for imports. It is blinding obvious that this cannot last. No Way!

The only avenues to make the international trade system sustainable are (1) for the US to import less, which will cause chaos in China, Germany, etc, possibly leading to war; or (2) for the US to produce more domestically, and exchange some of that real production for imports.

The 18th Century call for the unilateral elimination of tariffs on imports would obviously accomplish neither of those approaches.

Realist
Realist

It is interesting to see so many Americans want to trade places with China. It seems they would prefer to see the US have a large trade surplus with China. In exchange they would be willing to trade the American standard of living with the current Chinese standard of living. Or perhaps, they should emigrate to China and become part of the country that is “taking advantage” of America.

sunny129
sunny129

Basically, it boils down to CAPITAL vs LABOR

The mobile CAPITAL can go any where in the world, seeking profit in exploiting global labor arbitrage, with no regard to welfare of average wage working workers of ANY COUNTRY, including good ole USA!

The WAGE workers (majority of bottom 90%) cannot compete with the MOBILE capital of globalists and the top 10% who hold 80-90% of Bonds & stocks in USA. The average wage worker whose wage growth is stagnant is getting the short end of the shaft in this 'sham' war of tariffs (apparently NOT good for globalists!) Don't forget the subsidies of various kind, in both countries!

Whom are you kidding, Mish?