Here’s a letter to the Wall Street Journal.
Editor:
One of your reporters writes that “math played a role in the second quarter, when net exports – a measure of what the U.S. exports minus what it imports – subtracted a percentage point from the headline GDP number” (“U.S. Economic Growth Slowed to 1.5% in Second Quarter,” July 30). About this technical matter, she’s correct. But she’s incorrect to infer from this ‘math’ that U.S economic growth in the second quarter was “weighed down by strong imports.”
GDP = C (consumption spending) + I (investment spending) + G (government spending on final goods and services) + (Exports – Imports). GDP is an acronym for Gross Domestic Product. Because imports aren’t produced domestically, they are not part of GDP. Yet because spending on imports shows up in C, I, and G, the value of imports must be subtracted in order to accurately measure the value of what is produced domestically. Your reporter’s suggestion – a suggestion explicitly trumpeted by protectionists – that imports, being subtracted from GDP, necessarily reduce GDP growth, is an error caused by mistaking accounting for economics .
An analogy will help. Suppose Chateau Acme produces wines both from grapes that it grows in its own vineyards and from grapes that it buys from other vineyards. If Acme wants to calculate the value of the wine made from grapes grown in its own vineyards, it must subtract from the total value of its wine production the value of the wine that it makes from the grapes that it ‘imports’ from other vineyards. Yet it would obviously be foolish to say that the growth in Acme’s business is “weighed down” by Acme’s ‘imports’ of grapes from other vineyards.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
