Are Imports Bad for the Economy?

This activity is appropriate for a principles macroeconomic course. Prior to its implementation students would have already been introduced to the expenditure approach to GDP (Y=C+I+G+NX). Before class, the instructor will assign the 10-minute podcast. It may also be helpful to work through a simple numerical problem (see below) either in a preceding class or at home.

Overview

Students will listen to NPR's The Indicator podcast "Econ Explorer: GDP" before class that breaks down a quarterly BEA GDP report and explains (in an engaging way!) why interpreting higher imports as "bad" for GDP is naive. The activity pushes students to think about imports as an accounting variable rather than an expenditure variable in the expenditure approach and thus recognize, the purchase of imported goods and services, while increasing consumption and investment possibilities, have no direct impact on GDP.

Expected Student Learning Outcomes

After completion of this activity, students should be able to:

• Explain the role of imports in the overall health of the economy using the expenditure equation
• Critique the commonplace notion "imports reduce GDP"

Information Given to Students

Podcast: https://www.npr.org/2022/04/29/1095644299/econ-exploder-gdp

The Trump administration often publicly stated that the trade deficit was "a drag on growth" and that reducing imports would boost the economy. How would you explain to an average person why this idea is naive; i.e. why higher imports are not associated with lower GDP and lower imports are not necessarily associated with higher GDP?

A. More imports mean that Americans have the purchasing power to buy more goods and services, and this is positive for the economy. 
B. You would give an example of some other underlying factor that could decrease both trade deficit and the GDP simultaneously, 
C. More global trade helps businesses reduce production costs and allows consumers more variety in goods and services
D. Without imports, businesses would not have access to key intermediate goods that they need for productions of goods and services

• The podcast is a fun, engaging description of a BEA quarterly GDP report. This report was particularly interesting because GDP declined but the aggregate number may be misleading because there was considerable variation among sectors.
   
• The recap of the expenditure approach is useful for students though it is advisable that they are already familiar with it. A simple numerical problem before listening to the podcast will not only reinforce their understanding of the expenditure approach but help them start seeing imports as an accounting variable, not an expenditure variable.
   
• The activity is metacognitive as it pushes students to decide how they would explain to someone else why imports do not have a direct impact on GDP.
• Explanations for the available options for students:

Option A: This choice is appealing because it uses specific "counterexample" to show that more imports can boost GDP. As Econofact (link below) describes Consider a case where the United States has a spurt of growth due to, say, an increase in infrastructure spending. This spending will raise incomes and, therefore, consumption – including consumption of imported goods. This would be a situation where faster growth is associated with an increase in the trade deficit. Alternatively, the trade deficit could very well decline when there is a recession that reduces consumption of all goods, including imports.
Option B: Choosing this option would indicate the most higher order level of understanding– that students understand that both GDP and the trade deficit can be outcomes of underlying factors but not causally linked to each other. Students should have an example in mind. For example, a recession would decrease both domestic and foreign consumption so both GDP and imports would decline.
Options C&D: These options are both examples of benefits of trade. However, they stray away from the core idea of understanding imports within the expenditure approach

• The podcast and exercise may lead to an energetic discussion on costs and benefits of global trade. This is certainly welcome, but students should also not stray too far away from the core idea recognizing imports as an accounting variable

graph.docx (Microsoft Word 2007 (.docx) 40kB Aug16 22)

Q1) Based on the graph above, would you conclude that a trade deficit is good or bad for GDP? 

Answer: Students must understand the correlation in the graph can be positive or negative, so neither option is correct. This graph is evidence for options A&B in the AE. 

Q2) Why do we subtract import spending from total expenditures?

Answer:  Import spending is defined as spending on goods and services that are produced in foreign countries. When we total up consumption expenditures, investment spending, and government spending, this total includes spending on goods and services, regardless of where they are produced. That is, it includes some import spending. We must then subtract the value of import spending from total expenditures because we would be including spending on goods and services that is not the result of production of newly produced goods and services in the United States. We want total expenditures to reflect expenditures on final goods and services produced in the domestic economy.

• Econofact has a great explanation for this topic: Econofact:https://econofact.org/is-the-trade-deficit-a-drag-on-growth
• The following with exercise could be done in a preceding class or assigned. This exercise is based on a simple example for the St. Louis Fed's newsletter 

Fred and Sarah live on Islandia, a remote island. Fred catches fish in the bay, and Sarah climbs trees to gather coconuts. In this case, Fred and Sarah both produce and purchase goods—Fred sells fish to Sarah, and Sarah sells coconuts to Fred. In a given period, Fred sells 10 fish to Sarah for 4 shells (island currency) per fish, or 40 shells total. Sarah gathers and sells 15 coconuts to Fred for 3 shells per coconut, or 45 shells total.

• What is GDP using the expenditure approach?
• What is GDP using the income approach? (Note: the income approach is not part of the exercise, so this question should only be included if students have been exposed to it.)

Both answers are 85

Suppose Fred and Sarah "discover" a nearby inhabited island. Barney, on the neighboring island, sells 10 bananas to Sarah for 3 shells each, and Sarah sells 10 coconuts to Barney for 3 shells each. 

• Using the expenditure approach, how would bananas and coconuts be classified? 

For Sarah, bananas are imports and coconuts are exports. 

• How do bananas affect the GDP of Islandia?

Now bananas would count in consumption +(3x10=30), coconuts would be counted as exports +(3x10=30) and bananas would be subtracted as imports -(3x10=30). So we see that bananas do not impact the GDP.