Gongol.com Archives: April 2022

Brian Gongol

April 29, 2022

Business and Finance Bad math doesn't break the real economy

Measuring the size of the economy using gross domestic product (GDP) has always been an endeavor subject to judgment calls. While the GDP is intended to capture the total value of goods and services created by a country, it omits some values that are considered too hard to calculate -- like the equivalent value of all of the household labor devoted to things like cooking, shopping, and keeping up a home. Just because it's "non-market" work doesn't mean it's not valuable; in fact, it's probably worth trillions of dollars a year. ■ GDP is a necessary but insufficient tool for measuring the wellness of an economy. Like an individual's body weight or pulse, it's an essential part of the whole picture, but it has to be considered alongside a great deal else to start to form a holistic picture. With the preliminary data indicating that US GDP shrank in the first quarter of 2022, some people have already begun hyperventilating that "we are now halfway to a recession". ■ Strictly speaking, a recession is two or more consecutive quarters of negative real GDP growth. That doesn't really mean we are "halfway to a recession"; it only means that half of the conditions for a recession have been met. ■ An even more troubling misinterpretation of the facts is the claim that "A soaring trade deficit detracted from U.S. economic growth figures", in the words of the New York Times. The problem with that way of reading the figures is that imports are neutral to GDP. ■ GDP is only intended to measure what goods and services are generated domestically (again, it's gross "domestic" product). The equation used is "GDP = C+I+G+NX" -- consumption plus investment plus government spending plus net exports. ■ It's true that imports represent the negative half of "net exports" (exports minus imports). But all we're doing by subtracting those imports is removing their effects from what they added to C, I, and G. If you buy and eat a box of Belgian chocolates, it's added under "C" -- so we subtract it under "NX" so that we don't count the Belgian chocolates as American gross "domestic" product. ■ The subtraction has no effect whatsoever on what is generated domestically (at least, not in the sense that the New York Times headline would suggest). A "soaring" trade deficit is only harmful to GDP if it is a symptom that the economy is producing far fewer exports than it did before. If they do anything, imports often help the American economy to focus on those things it does best: Buying Taiwanese semiconductors, for example, helps the American automakers build more cars. Slowing down that pace of imports doesn't help the US economy; it hurts. ■ The only sense in which imports actually "deduct" from GDP is that it probably does serious damage to economists' brains when they repeatedly bang their heads against their desks over this misunderstanding of the data. For every other purpose, imports are neutral to the GDP.

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