Meet the Author

Owen F. Humpage |

Senior Economic Advisor

Owen F. Humpage

Owen F. Humpage is a senior economic advisor specializing in international economics in the Research Department of the Federal Reserve Bank of Cleveland. His research focuses on the international aspects of central-bank policies and has appeared in the International Journal of Central Banking, the International Journal of Finance and Economics, and the Journal of Money, Credit, and Banking. Recently, Dr. Humpage co-authored a history of U.S. foreign-exchange operations.

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Meet the Author

Caroline Herrell |

Author

Caroline Herrell

Carrie Herrell was formerly a research assistant in the Research Department of the Federal Reserve Bank of Cleveland.

02.02.10

Economic Trends

Imports and Economic Growth

Owen F. Humpage and Caroline Herrell

A quick look at the latest GDP data might suggest that imports are slowing the domestic recovery. A quick look might get it wrong.

Real GDP—the chief barometer of our nation’s economic health—increased 5.7 percent in the fourth quarter of 2009, according to advance estimates. In a standard analysis of the data, the Commerce Department calculates the contribution that each spending category in the accounts makes to the overall GDP growth rate. In the fourth quarter of 2009, slower inventory decumulation alone added a whopping 3.4 percentage points to the overall growth rate. Expanding exports, personal consumption expenditures, and business and residential investment together added another 3.7 percentage points to the quarter’s growth. In stark contrast to these growth contributors, expanding imports seem to have pulled overall economic growth down by 1.4 percentage points to the observed 5.7 percent. Expanding imports always appear as a drag on overall economic growth.

This unfortunate false perception results because imports enter the GDP account with a negative sign. Consequently, whenever imports increase, which is typically the case in a growing, open economy, they appear to take bite out of GDP growth. Appearances can indeed be deceiving. In fact, imports promote economic growth.

Interpreting imports in the GDP accounts requires some care. GDP measures the value of all final goods and services produced in the United States over each quarter. Last quarter, for example, the United States produced $13.2 trillion worth of output, as measured in 2005 dollars. Since imported goods are not produced here, they do not belong in the tally, but taking them out creates a small perceptual problem. The key expenditure categories of the GDP accounts, like personal consumption, business-fixed investment, and government spending, do not distinguish between outlays for goods and services produced in the United States and spending on goods produced abroad. That is, imports are already in these categories. Instead of removing imports from each individual spending category, the Commerce Department lists imports as a separate component in the accounts, which then gets subtracted from the total.

This methodology actually seems a superior way for handling imports, but interpreting the impact of foreign purchases on U.S. economic growth then requires giving some considerable thought to how we pay for these imports. To be sure, if American households buy $500 million worth of goods and services abroad during a particular quarter, they spend that much less on domestic goods and services. Still, the United States as a nation must pay for these imported products. If we happen to produce and export $500 million worth of goods and services in exchange, then trade overall—imports plus exports—will have no net impact on GDP. The value of output in this case would be exactly the same as if Americans had spent all of their income on domestic output and no trade had taken place. When balanced trade occurs, we have simply swapped some domestically produced goods and services for some foreign-made goods and services.

The process is somewhat more complicated, but essentially the same, when our imports exceed our exports, which is typically the case. When a country runs a trade deficit, it pays for the surfeit of imports by issuing financial claims—corporate stocks and bonds, Treasury securities, bank accounts, and the like—to the rest of the world. The funds made available when foreigners accept these financial claims on the United States do not sit idle in some U.S. bank account. They will end up financing additional investments or consumption in the United States. In fact, the U.S. current account deficit—essentially a broad measure of our nation’s trade shortfall—exactly equals the difference between gross domestic investment and gross domestic savings in the United States, allowing for measurement error. So what imports seem to subtract from the value domestic output (GDP) always reappears as exports, domestic spending, or domestic investment.

Ben Franklin never looked at a GDP account, but he got it right: “No nation was ever ruined by trade.”