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
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.
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."
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.
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.
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