Friday, September 14, 2018

Adding a dynamic to an accounting identity

How Imports INCREASE GDP

I hear the push back from 'imports subtract from GDP' idea:
In recent posts, Pierre Lemieux and Scott Sumner refuted a common but mistaken idea: that because gross domestic product can be calculated by taking national expenditure data (i.e., the “C + I + G” part of the equation) and adding the value of exports while subtracting the value of imports (the “X – M” in said equation), imports reduce GDP.

Free traders think trade is good, and their point is that trade with other countries boosts GDP. 

 That does not mean the (X-M) is incorrect. The accounting identity works because all goods go through ports and make the simpler method of looking at the in and outs of trade at the port. The positive dynamics of free trade are already calculated when the imports are shipped. Stick with the story, trade is good and show the dynamics. But an accounting identity is not a dynamic.

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