What If Fama Was a Protectionist?

Consumption includes Imports with a positive sign.

A Hazlitt-flavored argument would say that exports are the price we pay to get imports. So a reduction in our exports would generally lead to a reduction in our imports. On the flip side, if we kepted foreign products out they would not be able to pay for our exports. A reduction in imports will lead to a reduction in exports. Net exports would get smaller and approach zero.

But one should also remember that trade is beneficial to those who engage in it. By reducing the amount of trade you reduce the welfare gains to those who engage in it.

Additionally, I would say if protectionism was truly beneficial, why stop at raising national GDP by closing our borders to imports? Each state could increase its state GDP by closing its borders to other state’s imports. Each county within each state could increase its county GDP by closing its borders. Each city….

A rather more subtle point:

If the government simply BUYS all imports, government spending rises by the exact amount imports have reduced net exports, and you have a zero-sum situation. Buy at a premium – paying more than the market price – and you’ve actually increased GDP.

If the government then gives those imports away to large corporations who resell them, consumption goes up, and GDP rises again. Pay them to take the imports, and government spending rises, so GDP rises some more.

This creates an incentive for corporations to increase imports, i.e. invest in foreign companies – increasing investment, and GDP with it. The higher the premium paid for imports, and the more you pay corporations to take them, the greater the incentive.

So the obvious strategy to maximize GDP is for the government to buy everything at the highest possible price, then pay people as much as possible to take it away from them and sell it themselves on the open market. Choice is unaffected.

Gross Domestic Product (GDP) is not really gross, it is net.

The C+I includes the consumption and investment (i.e. purchase of capital goods)of imports. However, at the time goods are imported we do not know how the imports will be used.

For example, the purchase of a computer can be either consumption or investment depending on whether you are a household or a business.

In order to avoid double-counting, imports are subtracted from the total.

If imports are less, then so are C+I.

Flawed assumption: More is better.

The size of GDP is less relevant to the wellbeing of individuals than the utility they receive from the output they consume. Achieving any level of utility at lower GDP means also (presumptively) achieving it at lower cost and thus greater efficiency with respect to labor. There is no particular reason why a larger GDP is, de facto, desirable. What should matter is whether the particular level and composition of output achieved efficiently meets the needs of the economic participants. The whole of output, like each piece of it, has declining marginal utility because it requires the expenditure of labor, if nothing else, to produce.

That said, where trade is concerned, the equation must take into account the welfare of both the domestic and foreign economies in order to determine whether an efficient solution has been reached. It is not a complete analysis if it is conducted from only one side. It thus cannot tell us if this is an efficient pattern of behavior, much less a beneficial one.

My favorite trick in this context is to “prove” that rising depreciation will boost GDP. So gov’t should pass a law punishing truckers for changing their oil.

re-arranging, we have:

Y-C-G-I=NX=CA, where CA is the current account

S-I=CA, A higher CA means S>I, which can come either from a shrining in I or an increase in S. An increase in S can come from either an increase in Y, lower C or lower G.

hence increase in Y is not necessarily true.

Importing goods is the same as exporting dollars. Those dollars must eventually be spent in your country, increasing exports.

This is more or less the same thing Tom said, I think.

There is no flaw, only no point. GDP is one measure of well-being. A measure of well-being on the personal level is disposable income, and let’s call that all income after what’s spent on Food, in which case: DI=disposable income, Y=personal income, and F=cost of food, so DI=Y-F.

Clearly, decreases in F will raise DI, but so what? You still need to eat.

“The problem is what the problem usually is with Macro: void of any causal relationship.”

I wouldn’t say Macro is void of causal relationships – I’d say some macroeconomists simply ignore them when it suits their argument.

That is why is post is so good – it clearly indicates that an identity doesn’t mean much unless you understand the define the relationship between the variables by making a fallacious argument (namely it implicitly assumes that consumption and investment are not a function of imports, when in fact they are).

Did I miss something 60 odd years ago at Uva?

When Imports Exceed Exports, the balance goes to investments. Thus GDP by that formula will not decrease.

Go back and review the writings of Colin Clark.

Now consider another aspect:

Given the statistical definition of GDP,what is the effect when U.S. Investments abroad exceed foreign direct investments into the U.S.?