Gross Domestic Error in The Economist
The Economist is a serious magazine engaged in rational discourse, whatever you think of its political philosophy. Exceptions happen. One can be found in the opening section (“The World this Week”) of the current issue (May 25, 2019). It is all the more surprising as it relates to a simple and narrow topic. We read:
There was some head-scratching this week, as data showed Japan’s economy growing by 2.1% in the first quarter at an annualised rate, defying expectations of a slight contraction. Most of the growth was explained by a huge drop in imports. Because they fell at a faster rate than exports, gdp rose.
As I and other economists, including Scott Wolla of the St. Louis Fed, have explained, a change in imports cannot explain measured GDP growth, for the simple reason that imports do not enter into GDP at all. GDP, as its name (gross domestic product) indicates, measures gross domestic production only. At some stage in the practical task of measuring GDP, national statisticians do subtract imports because they were already included in the raw data they work from (in consumption expenditures, for example). The final result is, at it must be by definition of GDP, that imports did not affect the calculation of GDP or of GDP growth at all.
Once we understand what GDP is and how it is measured (more about this in the links above), the argument is a simple accounting and logical one: whether M represents imports or any other variable, it is always true that
One way to see the main point is the following. Suppose “the country,” that is, all individuals and their intermediaries, exported all the GDP they produced and used the proceeds to import everything they consumed. We could not say that imports explain why GDP is zero. GDP would not be zero: it would still be equal to domestic production, which would happen to have been all exported and exchanged for imports.
Thus, the drop in imports in no way explains the higher growth of Japanese GDP.