Imports, Exports and GDP

“The key is to understand that imports are also included in consumption, investment, and government spending. The real GDP breakdown looks like this:

  • GDP = Domestically produced consumption + Imported consumption + Domestically produced investment + Imported investment + Government spending on domestically produced stuff + Government spending on imported stuff + Exports – Imports

So you can see that while imports are subtracted from GDP at the end of this equation, they’re also added to the earlier parts of the equation. In other words, imports are first added to GDP and then subtracted out again. So the total contribution of imports on GDP is zero.”

That is an excerpt from a lovely little write-up by Noah Smith on his Substack, and one that I’ll be using whenever I teach macro. It’s lovely for many reasons, but most of all for the reason that the bullet point goes a very long way towards making the point that a lot of folks miss: you don’t get rich by importing less.

When I say “you”, I mean the country in question – and this equation, written out this way, helps us understand why. If you’re a student of macro, and are under the impression that India will get richer if only we imported lesser, think about the definition of GDP:

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

https://www.investopedia.com/terms/g/gdp.asp

If you think about it, how can imports possibly qualify as being produced within a country’s borders? As Noah says, the equation can also be written like this:

GDP = Domestically produced consumption + Domestically produced investment + Government spending on domestically produced stuff + Exports

https://noahpinion.substack.com/p/imports-do-not-subtract-from-gdp?s=r

Read the rest of Noah’s post, especially if you are a student of macroeconomics. It should help clear up a lot of basic, but important and often misunderstood ideas about GDP calculations.


https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus

Russia has stopped publishing detailed monthly trade statistics. But figures from its trading partners can be used to work out what is going on. They suggest that, as imports slide and exports hold up, Russia is running a record trade surplus.
On May 9th China reported that its goods exports to Russia fell by over a quarter in April, compared with a year earlier, while its imports from Russia rose by more than 56%. Germany reported a 62% monthly drop in exports to Russia in March, and its imports fell by 3%. Adding up such flows across eight of Russia’s biggest trading partners, we estimate that Russian imports have fallen by about 44% since the invasion of Ukraine, while its exports have risen by roughly 8%.

https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus

Think about the previous section, and try and answer this question: is Russia poorer or richer or unchanged because Russia isn’t importing as much, as measured by GDP and changes in GDP?

Well, Russia may be worse off, and Russians may be worse off. It’s leader?

As a result, analysts expect Russia’s trade surplus to hit record highs in the coming months. The iif reckons that in 2022 the current-account surplus, which includes trade and some financial flows, could come in at $250bn (15% of last year’s gdp), more than double the $120bn recorded in 2021. That sanctions have boosted Russia’s trade surplus, and thus helped finance the war, is disappointing, says Mr Vistesen. Ms Ribakova reckons that the efficacy of financial sanctions may have reached its limits. A decision to tighten trade sanctions must come next.
But such measures could take time to take effect. Even if the eu enacts its proposal to ban Russian oil, the embargo would be phased in so slowly that the bloc’s oil imports from Russia would fall by just 19% this year, says Liam Peach of Capital Economics, a consultancy. The full impact of these sanctions would be felt only at the start of 2023—by which point Mr Putin will have amassed billions to fund his war.

https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus (Emphasis added)

Macro is hard! But it also matters, especially at times such as these.

Leave a Reply