Academic journal article Economic Commentary (Cleveland)

Do Imports Hinder or Help Economic Growth?

Academic journal article Economic Commentary (Cleveland)

Do Imports Hinder or Help Economic Growth?

Article excerpt

Americans generally seem confused, and even doubtful, about the value of imports to the U.S. economy. Last year, they spent nearly $1.3 trillion on foreign goods and services, presumably preferring these expenditures to any other use of their money. Importing not only provided Americans with a wider array of products than they otherwise could have enjoyed, but by stretching their budgets, importing enabled them to buy more goods and services-domestic and foreign-than would have been possible under autarky. In this way, imports improved America's collective standard of living.

Yet, when queried about imports in the abstract, Americans express attitudes ranging from ambivalence to hostility. Many regard them as a necessary evil, noting with grudging resignation that a nation cannot long export if it does not import. Some find no fault with importing foreign products that are not made or grown at home, but they otherwise claim to favor a buy-American policy. Often, these people do not realize the foreign contribution to the everyday items they buy. Most Americans express concern about the rapid overall expansion of imports but fail to connect this aggregate pattern to the welfare-enhancing behavior of individuals.

For their part, economists bear the responsibility for much of the muddle. When asked about the economic impact of imports over the past year, a business economist might explain that brisk gains in imports exerted a drag on overall CDP growth. If pressed to explain their rapid rise, this same analyst might citewith little concern for the seeming contradiction-the fast pace of U.S. business expansion. When asked about the long-term impact of imports, however, a development expert, echoing Adam Smith, might explain that they contribute importantly to the creation of wealth. Can all these explanations be right?

As this Economic Commentary points out, imports do not lower economic growth. Imports and economic growth are positively correlated, with causality running in both directions. Faster economic growth does indeed lead to higher imports, but countries that are open to trade-imports and exports-tend to grow faster than countries that are closed or less accessible.

* Imports and the GDP Accounts

Every news account that accompanies a quarterly GDP release reinforces, or so it seems, the common misperception that import spending lowers output. The source of the fallacy is understandable: Imports enter the GDP tally with a negative sign (see table 1 ). Because GDP measures the overall dollar value of final goods and services produced in the U.S. during a specific quarter or year, items bought from abroad must be removed from the tally. In 1999, for example, GDP was $9.3 trillion dollars, and Americans bought almost $ I .3 trillion of foreign goods. It does not follow, however, that GDP would have totaled S 10.6 trillion if we had bought only domestic goods and services. Similarly, between 1998 and 1999, total GDP advanced 5.6 percent while imports advanced 12.3 percent. It is not the case, however (as is frequently claimed), that GDP would have grown faster had people spent their incomes on domestically produced goods instead of imports. Imports do not, in fact, depress the GDP total because of the way they are financed.

As a nation, we pay for our imports either with exports of our current output or with financial claims against our future output. When exports rise (or fall) in line with imports, GDP remains unaffected. Exports add to the output tally-exactly what imports subtract-and net exports (the trade balance) do not change.

Since 1992, however, exports have fallen short of imports by a widening margin. In 1999, the trade deficit amounted to $256 billion. When this happens, we must finance the trade shortfall either by reducing previously acquired claims on foreign output or by offering foreigners claims on our future output. This is accomplished largely through the exchange of various types of financial securities and bank accounts. …

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