… not mean that an increase in imports (“M”) reduces GDP. In the print edition of tomorrow’s (Wednesday’s) Wall Street Journal, Phil Gramm and I do our best to bust the myth that the “-M” part of the GDP equation means that imports reduce GDP. A slice:
The BEA collects data on total consumption, investment and government spending and must subtract imports in computing GDP. But that’s no statistical artifact. GDP is a measure of domestic production, and imported goods aren’t produced in the U.S. Exports are also added in measuring GDP, since they are produced but not consumed here. The GDP number for the quarter is down because America produced less, not because it imported more.
So what did cause the decline in growth in the first quarter? It appears to have been largely the product of the massive uncertainty that the Trump administration’s trade policy has created as it wreaked havoc on supply chains and global commerce. Since most of the proposed tariffs have yet to go into effect, the negative growth of the first quarter is simply a warning of much worse to come if the administration doesn’t call off its trade war.
