A story that’s making every economist in America snarl at every journalist in America. This is the sort of error that is cleared up in the first semester of an economics class. We’ll take the New York Times as our example, but we’ll see it on every news page in the country:
“G.D.P. Report Shows the U.S. Economy Shrank, Masking a Broader Recovery.”
“A soaring trade deficit detracted from U.S. economic growth figures,” according to the subhead.
No, the trade deficit does not change the size of GDP. Trade doesn’t change the size of the economy at all. This is a pre-freshman Econ 101 mistake. Yet every paper in the country is making it.
“The ballooning trade deficit, meanwhile, took more than three percentage points away from G.D.P. growth in the first quarter,” according to the piece) Imports, which are subtracted from gross domestic product because they are produced abroad, have soared in recent months as U.S. consumers have kept spending. But exports, which add to G.D.P., have lagged in part because of weaker economic growth abroad.”
To explain it without equations — everything that is produced is consumed, everything that is consumed must have been produced. So, production equals consumption. When we try to work out what has been produced it just turns out that it’s easier to measure what has been consumed – that’s just the way the numbers work. We have more of those numbers lying around already that we can then add up.
But GDP is gross domestic product – what was actually made in America? Imports were consumed in America, that’s why they were imported. Exports were made in America but sent away for other people to consume. So, to calculate domestic production we must add what we sent out and subtract what we shipped in. Not because imports subtract from the American economy, but because we’ve already counted them in what was consumed.
Trade doesn’t make the American economy smaller, we just don’t want to count it all twice.
OK, we can look at this and think it’s just the pointy-heads getting upset. But it has two important effects. The first is that the more this is repeated the more readers will think that the trade deficit does make Americans poorer. It’s not true, so it’s not something that journalists should be leading people to believe.
The second is a much larger point. Near all of us gain our knowledge of economics and the economy from the regular media. And if they’re getting something as simple as this wrong then what else are we being grossly misinformed about?
Here is one former journalist who does get it right, Noah Smith. He used to teach at Stony Brook and then went to Bloomberg and is now independent.
“Imports ADD to consumption, investment, and government spending. Imports SUBTRACT from net exports. These two EXACTLY CANCEL OUT. For the purpose of quarterly GDP accounting, imports have no effect on GDP. None. Zero. Nada.”
This is not correct.
Imports ADD to consumption, investment, and government spending.
Imports SUBTRACT from net exports.
These two EXACTLY CANCEL OUT.
For the purpose of quarterly GDP accounting, imports have no effect on GDP. None. Zero. Nada. https://t.co/w4Ik6ZVF7I
— Noah Smith ??? (@Noahpinion) April 28, 2022
The equation (yes, sorry, an equation in economics) is Y = C+I+G+(X-M). Those imports (M) are already included in the C+I+G part.
Every media outlet in the United States today is getting this wrong. Which isn’t a good sign for the economic news we get from the American media, is it?