On this blog and elsewhere, I have been arguing, perhaps too often in some people’s perception, that presenting imports as a “deduction from GDP” is a gross accounting error. See for example my October 30, 2017 post “Misleading Bureaucratese.” (I also touch on the issue in my new book, What’s Wrong with Protectionism.) This elementary error is everywhere and very frustrating, even if the national statisticians at the Bureau of Economic Analysis and any economist cognizant with the national accounts know it is an error.

In the September 4 issue of the St. Louis Fed’s Page One Economics, staff economist Scott Wolla has a neat, clear, short article that explains the error. It is worth reading the whole article, titled “How Do Imports Affect GDP?“, but its main points are the following (emphasis in original):

Imports do not add to or subtract from GDP, even though the equation reads GDP = C + I + G + (X – M). …

GDP measures domestic production, so imports (foreign production) should have no impact on GDP. …

The expenditure equation seems to imply that imports reduce economic output. For example, in nearly every quarter since 1976, net exports (X – M) have been negative … , which seems to imply that trade reduces domestic output and growth. This can influence people’s perspective on trade. This essay explains that the imports variable (M) corrects for the value of imports that have already been counted as personal consumption (C), gross private investment (I), or government purchases (G). And remember, the purchase of domestic goods and services should increase GDP, but the purchase of imported goods and services should have no direct impact on GDP.

In general, the St. Louis Fed provides very useful research and publications, besides its remarkably user-friendly FRED database. Wolla’s explanation of the misuse of the GDP expenditure equation is another contribution to economic education.

In the Fall issue of Regulation, which had already gone to press when Wolla’s article appeared, I will once gain address the GDP-import error while analyzing the arguments of Peter Navarro, an economist who should know better even if he is now in the White House. For many years, in fact, Navarro has been a vocal seller of this economic snake oil.