> GDP = Consumption + Investment + Government Purchases + Net Exports
> When the American buys the $1000 TV from China, U.S. consumption goes up by $1000. And U.S. net exports go down by $1000, since “net exports” means exports minus imports. The increase in consumption exactly cancels out the fall in net exports. So the total contribution of the imported TV to U.S. GDP is zero.
This is not how buying a TV works, at least not if you buy through normal retail channels. You pay the store $1000 and you get a TV that the store bought for around $500. If it came from a US company that outsourced manufacturing to China, the US company keeps $250 and sends $250 to China.
The store pays salaries and rent. The brand pays salaries and rent and R&D and such. GDP increases by at least $750, plus a bunch because a lot of those salaries turn into consumer spending.
And this applies to sales abroad, too. When someone in France buys a CPU or GPU or iPhone, the physical product may never touch US soil, but most of the purchase price ends up in the US, and that contributes to the GDP and to the economy in general. A country could do just fine, sustainably, by designing products, paying foreign countries to manufacture them, collecting profits, and spending some of those profits to buy foreign-made goods. No physical goods are ever exported, the trade-in-services numbers may or may not be nonzero, the trade-in-goods balance will be enormously negative, and this is fine.
They’re saying that treating the “minus M” part of C+I+G+X-M is just an accounting step so that you don’t need to manually subtract imports from each of C+I+G (ie. the weighing yourself analogy; instead of taking your clothes off and weighing yourself, you can weigh yourself and subtract the weight of your clothes).
Everything you said is correct (and means that the statement “imports subtract from GDP” is even more wrong) but not what the author is pointing out.
This is true. But the author seems to be perpetuating a different misunderstanding: that, when you spend $1000 at a store to buy a TV, $1000 is disappearing out of the US economy and going straight to China or Korea.
> Imports subtract from the Commerce Department’s calculation of GDP
Government page he links:
> The decrease in real GDP in the first quarter primarily reflected an increase in imports, which are a subtraction in the calculation of GDP
I don't get it. Aren't the journalists reporting and citing the official numbers/methods?
His basic thesis can be summarised with "The short version of the story is this: GDP is a measurement of everything produced within a country’s borders. Imports are produced outside a country’s borders. So imports don’t add to or subtract from GDP. Imports simply aren’t counted in GDP at all." and he justifies it using other words. It is quite a reasonable argument - the accounting formula for GDP (C + I + G + (X − M)) is misleading because the M isn't a subtraction but an adjustment to prevent something like double-counting.
Which is kind of weird given the snark.
rufus_foreman•9mo ago
The increase in consumption does not happen at the same time as the fall in net exports.
Imports have increased in advance of tariffs. The imports are happening before the consumption. The imports that happen before the consumption of those imports subtract from GDP.
Yes that is a reason GDP might fall. In this quarter, if tariffs aren't revoked, we will consume the imports that happened to front run the tariffs. That will increase GDP in this quarter.
Noah Smith is not stupid. Noah Smith knows this. The questions for me are "Given that Noah Smith knows this, why does he write the article he does" and "Given that Noah Smith knows this, why would anyone rely on Noah Smith for their economic news". That's what I'm curious about.
orangecat•9mo ago
Let’s take another example, which is more like what actually happened in Q1. Suppose an American company, Best Buy, decides to buy a Chinese TV and put it in a warehouse, because it knows that tariffs are coming soon. That purchase counts as inventory investment. So investment goes up by $1000. And just like in the previous example, net exports go down by $1000. The two cancel out, and the total contribution of the imported TV to U.S. GDP is zero.
rufus_foreman•9mo ago
Bureau of Economic Analysis is wrong here?
kspacewalk2•9mo ago
satanfirst•9mo ago
Not wrong, deceiving. Real GDP is down because of some factors that cancel out and because the President sucks. Is the correct way to read that executive approved message.
https://en.wikipedia.org/wiki/Howard_Lutnick
https://www.bea.gov/
"These movements were partly offset by increases in investment, consumer spending, and exports."
You can't make someone understand what that investment and consumer spending is if their job depends on not understanding it.