No, imports do not reduce GDP

Spoiler: Statistics Sweden reported in a news brief that net exports explained a reduction in GDP compared to a previous period. This is wrong. Later in the same brief they defined GDP as the sum of goods and services domestically produced during a period of time. This is correct.

This misunderstanding is often repeated in the media. It is probably due to a sloppy reading of the National Accounts definition of GDP. This states that GDP = Private Consumption + Government expenditures + Investments + Exports – Imports. But imports are deducted from GDP because Consumption, Investments, and Exports include imported goods and services. Imports and the imported parts of the other components cancel out.

In a press brief, Statistics Sweden’s wrote: “GDP decreased by 0.8 percent in the first quarter 2022, seasonally adjusted and compared to the previous quarter. The downturn is mainly explained by net exports.” (My italics)

Futher down in the same brief Statistics Sweden wrote: “Gross domestic product, GDP, is defined as the value of all goods and services produced in the country.” Correct; produced in the country, not abroad. Therefore, imports cannot reduce GDP.

It is a common misunderstanding, often repeated in the media, that imports reduce GDP. I think it is due to our writing of GDP as the sum of its components.

GDP = Private Consumption + Government expenditures + Investments + Exports – Imports.

And if you define Net exports = Exports – Imports, you might think that if imports increase more than exports in a year, GDP will fall that year. But this is wrong. Private Consumption + Government Expenditures + Investments + Exports also include imports. Both households and firms buy a lot of stuff that is imported. Clothes, furniture, domestic appliances, wine and so on. That goes for the government’s expenditures as well. Investments are expenditures on buildings, machinery and ICT which are both produced domestically and imported. Exports also contain imported stuff. Swedish exports of Volvos include many parts and components that are imported and assembled with domestically produced parts and components before they are shipped from our ports to the rest of the world.   

Therefore the equation above should read.

GDP = Private Consumption of domestic products + Private Consumption of imports + Government expenditures on domestic products + Government expenditures on imports + domestically produced Investments + imported Investments + domestically produced Exports + imported Exports – Imports.

Because

Imports = Private Consumption of imports + Government expenditures on imports + imported Investments + imported Exports

Writing it likes this makes it clear that imports are first added and then subtracted from the equation. All that is left is what is domestically produced.

GDP = Private Consumption of domestic products + Government expenditures on domestic products + domestically produced Investments + domestically produced Exports

Contrary to what is written in misleading press briefs and articles about imports reducing GDP, imports are good. The larger the GDP, the more we can import and consume. The point of production is to consume because we enjoy having better clothes, nicer homes, drinking whisky, wine, go on holidays abroad and so on and so forth. The consumption of those goods and services are the rewards from all the blood, sweat and tears we endure when putting in so much work in producing stuff the rest of the world wants, i.e., exports.

We export to be able to consume more today and in the future. Imported goods and services are imported today. Imported investments are used to make our production capacity better and bigger so we can consume more in the future, both by consuming the production and by exporting it so we can buy more imports.

There, fixed it for you Statistics Sweden!

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