Why does a rise in imports lower gdp?
FYI, a loyal MR reader and commentator, writes to me:
I would like to suggest a topic for your blog: the way imports are used in the GDP calculation. To me it makes no sense that we would decrease our GDP every time something is imported. What is the rationale here? That we are sending 'gold overseas'? I mean, if one really believes that trade works by exchanging items of same perceived value (I give you $50 and you give me a $50 product) how can we ever explain this GDP deduction? Isn't this another mercantilist heritage that proves how not so free our trade system is?
The rationale is a) that is simply how the number is calculated, and b) a nation's capacity to produce goods and services determines its long-run standard of living. On b), you might argue that the world's capacity to produce goods and services is what matters in a globalized setting, which returns us to FYI's question.
The comments of Angus are on the mark ("People, Accounting identities do not imply causation!"):
As a matter of accounting, the arithmetic is correct. But the suggestion that the trade deficit CAUSED growth to be lower by some measurable amout is completely unproven and just plain wrong.The argument implies that there somehow would have been perfect substitutes for all imported goods being produced domestically and available for sale at the same price. Thus, if we could just keep out those damn imports, growth and jobs would soar.
Yet, this is far from true on the face of it, let alone considering if we banned all imports, we'd have a pretty hard time making any exports and that might create a "drag" on growth too, no?