For many years, the United States has imported more physical goods than it exports. When the government reports how much our economy is producing, imports often are blamed for reducing output. This is usually wrong, but understanding why requires some knowledge of just what we measure about output and trade and how they relate.
Gross domestic product is what we use to measure the value of goods and services we produce. That is all it really indicates. It is not a measure of how well-off people are, or how rich we are or whether the economy is doing well or poorly, even though people often interpret it that way.
The objective is to add up the dollar value of all the goods and services that people, businesses, other organizations and government use to meet society’s needs and wants. At the same time, we do not want to double-count. We want to know the value of “final goods and services,” those in the form in which they are actually used.
For the hamburger sandwich we eat, we don’t want to count the grain leaving the farm, then add the flour leaving the mill and then the bun leaving the bakery. If we eat the bun at home we count what we paid at the grocery store. If we eat it at a fast-food joint, it is included in what we paid for the whole sandwich.
Similarly, for a car we just count the car, not the iron ore and the steel and the connecting rods or gears made by some components supplier.
The values of final goods that we tabulate fall into four categories: consumption, investment, government and net exports.
For the first, consumption, we list all the private-sector things that households use – food, clothing, shelter, transportation, health care and so on.
“Investment” consists of all the new facilities and machines acquired by businesses. We don’t subtract the existing machines that wear out, which is why we call it gross domestic product. Subtracting such long-lived machines, factories and infrastructure, would give us net national product.
Then we add the value of government. It is hard to measure the value to society of national defense or interstate highways, so we just assume that the labor and materials government buys are a good proxy for the value of what it produces. And we don’t count transfer payments to individuals like Social Security or student financial-aid grants.
Finally we add net exports, or the value of exports minus imports. Here’s where much of the confusion starts. If we export more than we import, then net exports increase measured output. But if net exports are negative, as they have been for some time, then including this category in our tabulation reduces measured output.
That causes confusion as in a recent headline, “Imports cut GDP.” The accompanying article noted that imports had increased during the quarter in question. Higher imports mean a bigger value of net exports to be subtracted from the sum of consumption, investment and government spending.
The headline thus was true in an arithmetic sense under the “all other things being equal” assumption economists often use. That is, measured GDP would have been larger if imports had been smaller and consumption, investment, government and exports all had remained the same.
The problem is that these factors would not have remained constant. Lower imports probably would have been associated with lower household consumption or business investment. It conceivably could have been paired with lower government outlays. And in the long run, exports would almost certainly drop as imports did.
So in the real world, a drop in imports would not be paired with steady consumption, investment, government and exports and thus higher tabulated GDP. Lower imports probably would accompany lower GDP.
Many fall into the classic mercantilist fallacy: “If we didn’t import things like reinforcing rods or children’s pajamas or milling machines, we would produce those items in our own country with resources that currently are unused. They would not cost any more than imports. Households, businesses and government all could buy exactly what they are buying now and no one would suffer in any way.”
That’s not the way it works. Yes, we could produce more steel or clothing or machine tools. But it would take resources away from some other current use. The products would cost more. And if we reduced imports by imposing tariffs or other trade barriers, other countries would use the same measures to reduce purchases from us.
All things being equal, more goods and services to meet society’s needs is a good thing. Imports don’t reduce this.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.