# How do imports affect GDP?

## Summary

Imports are perhaps the most misunderstood portion of the GDP identity (Y=C+I+G+NX). This exercise uses real data to have students explore this issue and learn the nuance behind the numbers.

## Context for Use

This activity can be used in Principles of Economics, Macroeconomic Principles, and Intermediate Macroeconomics courses. Simply adjust the difficulty level for your specific class and students. The exercise takes about 15-20 minutes and there are no class size limitations.

## Overview

This exercise helps students improve their understanding of the GDP equation. The focus is on the "net exports" component, which is commonly misunderstood. People often think that because the U.S. has a trade deficit it means that imports are subtracting from GDP. Therefore, they argue that if we restrict imports (through tariffs or other means) it would somehow increase U.S. GDP. However, this logic is incorrect and based on a flawed interpretation of the GDP equation. This exercise is intended to make that point clear to students by using real data on something with which the students are likely familiar – chocolate.

## Expected Student Learning Outcomes

Students will develop a deeper understanding of how imports affect GDP, both in the accounting sense and in the other economic activity enabled by these imports.

## Information Given to Students

The Observatory of Economic Complexity (OEC) is a project from MIT that provides comprehensive information (including visuals) about all products exchanged in the global market. For example, cocoa beans are the 314th most traded product in the world. Go to the OEC website and use the information provided to help answer the following questions:
1. Who are the top 5 exporters of cocoa beans? What do these countries have in common?

2. What is the value of the U.S.'s imports of cocoa beans?

3. What is the net impact of these imports on U.S. GDP?
a. GDP increases by more than the import value
b. GDP increases exactly by the import value
c. GDP decreases exactly by the import value
d. GDP decreases by more than the import value
e. GDP does not change

a. Very confident
b. Somewhat confident
c. Not confident
d. Totally guessing

5. Should the U.S. stop importing cocoa beans and instead produce them domestically? Why or why not?

Student Handout for How to imports affect GDP? (Microsoft Word 2007 (.docx) 14kB Aug24 19)

## Teaching Notes and Tips

Imports are a commonly misunderstood topic. In terms of the GDP equation, an increase in imports is offset by an increase in one of the other components of GDP (C, I, or G). Although cocoa beans are an intermediate good, their value is reflected in the price of the final good (a piece of chocolate). From this perspective, the import of the cocoa beans themselves does not change GDP. However, one could argue that importing them allows for other productive activities to take place (e.g. transporting the beans, processing the beans, marketing teams for chocolate, etc.), so this allows some room for discussion and provides critical thinking opportunities for students.
The first two questions can be completed by students prior to class if you wish; the only caveat is that some team discussion may be necessary for students to realize that the exporters of cocoa beans are all situated near the equator. Questions 3 and/or 4 can be completed as a clicker question individually (think-pair-share) or as a team with the traditional simultaneous reporting of TBL. The fourth question supports metacognition, in which students step back and think about their learning and knowledge. The fifth question is optional (but encouraged) for those instructors that might want to begin a broader discussion of trade deficits and their implications; it asks students to use their critical thinking skills to apply the knowledge they have just learned. Be sure to ask students to justify their answers – in this case, it may even be good to have them construct a written response.

## Assessment

In a follow-up quiz or exam, provide students with numbers for a different good or service and ask them to do a similar analysis. Some interesting examples include: rice, for which the U.S. is a top exporter and a top importer; avocadoes, for which Mexico is a top exporter and the U.S. is a top importer; and semi-conductors, for which mostly Asian countries are top exporters and the U.S. is a top importer. Students are more likely to retain what they have learned if you can make the example real to them. Try to think of a product with which they are familiar and buy regularly.

## References and Resources

1. St. Louis Federal Reserve Blog Post: "How Do Imports Affect GDP" by Scott Wolla
2. The Observatory of Economic Complexity has a tremendous amount of data on trade flows, including great data visualizations.