Imports Do Not Subtract From GDP Growth
GDP Maths Made Easy
For the love of god, imports are GDP neutral.
US Q1 GDP was released yesterday, coming in at -0.3% on an annualised basis. What was perhaps more shocking than the negative print, is the apparent lack of understanding of how GDP works among many commentators.
The above chart from the BEA led many to conclude that while imports were a big drag on growth due to tariff front running, investment was really buoyant which was suggestive of some sort of bullish domestic driver of growth that was unexpected. However, this idea of strength in investment largely just ignores how GDP works.
We can show that the prevailing narrative here was front running, and there is no separate optimistic take for investment - they are two sides of the same coin.
We start with the well-known GDP by expenditure equation:
GDP = Consumption + Investment + Exports – Imports
Where consumption includes both private and public consumption, investment includes both inventories and fixed investment, and exports minus imports is net exports. What this equation masks is a methodological nuance, that consumption and investment include both imported and domestically produced components.
We might equivalently write:
GDP = Domestically Produced Consumption + Imported Consumption + Domestically Produced Investment + Imported investment + Domestically Produced Exports – Imports
And given imports can be broken down into consumption and investment, we have
GDP = Domestically Produced Consumption + Imported Consumption + Domestically Produced Investment + Imported investment + Domestically Produced Exports – Imported Consumption – Imported Investment
And we can now cancel some terms
GDP = Domestically Produced Consumption + Imported Consumption + Domestically Produced Investment + Imported investment + Domestically Produced Exports – Imported Consumption – Imported Investment
Giving us
GDP = Domestically Produced Consumption + Domestically Produced Investment + Domestically Produced Exports
Which is everything that is produced domestically, i.e. gross domestic production or GDP.
The confusion here comes in that statistical offices gather data on imports at the border and consumption and investment internally, so it is easier to net out the imports at the end as opposed to trying to figure out which bits of consumption and investment were domestically produced and which bits are imported.
So that big growth in investment in the first chart was largely just cancelled out by the negative import contribution, because it was largely imported so should not count in our GDP calculation.
We can see the cancelling out if we dive into the figures behind the Q1 GDP release. On page 8 of the release, we have the pp contributions to GDP growth, and we can see that the very large negative contribution from imports (-5.03pp) is somewhat offset by contributions to GDP growth from increases in fixed investment (+1.34pp, which are largely IT equipment +0.96pp) and inventories (2.25pp).
These big increases here are not some positive narrative unfolding in spite of the tariff related front running, they are the front running. Further, given that the big negative contribution from imports is larger than the inventory and fixed investment builds, we can surmise that perhaps a decent chunk of the already mediocre privately consumed goods outturn (+0.11pp) was actually imported goods. This would make sense given it was likely not just businesses front running tariffs, but also households. This would mean that domestically produced goods growth was also weak, which is not a good sign for growth.
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