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When It Comes to GDP, 2 - 1 = 2

The U.S. Bureau of Economic Analysis’ report on the fourth quarter GDP figures talks of imports as “a subtraction in the calculation of GDP.” The problem is, in the concept of gross domestic product, imports are not a subtraction. The BEA’s formulation is at best misleading. Indeed, The Wall Street Journal has apparently stopped reproducing it.

As its name says, gross domestic product tries to measure what is produced within the borders of a country. It includes exports, which are produced domestically, and takes no notice of imports, which are produced in foreign lands. GDP is, by definition, the sum of all value added within the national borders.

Total value added in an economy is identical to the sum of all domestic incomes (roughly, profits plus compensation of employees). What you produce is equal to what you earn. Thus, GDP is conceptually equal to domestic income, and can be alternatively calculated from the income side of the economy. “Product = income” is thus an accounting identity in the national accounts.

A second identity of the national account system is: income = expenditure. What domestic residents earn is consumed, or else saved and invested. Hence the expenditure approach to GDP. It is true that, in practice, when GDP is measured on the expenditure side, imports have to be subtracted from the sum of consumption expenditures, investment expenditures, government expenditures and exports, in order to take out what is spent on something other than domestic production. Entering imports as a negative on the expenditure side of the national accounts identities (product = income = expenditure) is only an accounting requirement made necessary by the fact that domestic production is what it is measuring.

Saying that imports have to be subtracted from GDP is like saying that, in calculating its net income, a firm would have to deduct the total value of the year’s borrowing.

Presenting imports as a subtraction from GDP conveys the wrong impression—that they are bad for the economy. In fact, from the point of view of welfare—of which GDP, even conceptually, is only a very rough approximation—imports are not a cost but a benefit, just as, in economic life, production is the cost and consumption the benefit.

Pierre Lemieux is a Research Fellow at The Independent Institute in Oakland, California, and Associate Professor of Economics at the University of Quebec at Outaouais in Canada.

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