Confusion May Lead to Contradictions
Reading The Economist, I stumbled on a passage on which any economist who remembers the national accounting he learned in graduate school or perhaps even in college, would stumble, even if the confusion is pretty common (“Could America’s Economy Escape Recession?” The Economist, dated July 20, 2023):
Although GDP growth has held up well over the past few quarters, its close relative, gross domestic income (GDI), has been anaemic. In theory the two ought to be aligned. GDP tracks all final expenditures in the economy, summing up consumption, investment, government spending and net exports over a specific period.
The characterization of GDP in the last sentence is incorrect or at least misleading. GDP is defined as production (gross domestic product) within a given territory (gross domestic product) of goods used for final consumption or for exports. (Whatever else it also “tracks” is another matter.) By definition, it does not depend on imports and thus on “net exports” (exports minus imports). Whatever the amount of imports, the calculation of GDP is not affected by one cent. I have explained this simple accounting fact in a number of posts and articles, referring to official and independent sources. The best way to approach the question may be to read my last post on the subject and follow the links to other posts and sources. The journalist or editor of the article quoted above is thus mistaken on the very definition of GDP, if it is not just careless writing.
In the same weekly issue of The Economist, another article quickly refers to the correct definition of GDP (“How Much Trouble Is China’s Economy in?” The Economist, dated July 17, 2023):
That is an unconvincing explanation for the weakness of China’s nominal growth, because GDP should count only the value added to a good in China itself, thus excluding the value of imported commodities.
Here, “excluding” correctly implies that imports cannot be added to nor deducted from GDP, because they have no impact at all on the way it is constructed—just like, say, what happens on Sirius has no impact on the way your profits are calculated. This quote contradicts the previous one.
Is The Economist hopelessly confused? Perhaps. Confusion may lead to contradictions. But perhaps I am being too critical. Instead of the venerable magazine being hopelessly confused, the apparent contradiction between the two quotes could mean that at least one writer and one editor—those involved in the second article—know what is the technical definition of GDP and what it implies, what it is designed to represent and not designed to represent.
Putting the last hand on this post, I noticed that the Wall Street Journal is alas well representative of the general confusion about the relationship between imports and the calculation of GDP. Its story of Thursday on the second-quarter growth of GDP is, on this topic, fuzzier but perhaps even more glaringly misleading by using “net trade” instead of “net exports” (“U.S. Economic Growth Accelerates, Defying Slowdown Expectations,” July 27, 2023):
Net trade slightly subtracted from second-quarter growth, reflecting a sluggish global economy.