Thread by @Noahpinion

1/The other day I wrote a post about how imports do (and don't) affect GDP.

So I thought I might write a thread laying it out.

bloomberg.com/opinion/articl…

2/Trump thinks that tariffs boosted U.S. GDP growth in the first quarter.

Why?

https://twitter.com/realDonaldTrump/status/1127891815628144640

3/Maybe because imports fell, and Trump thinks that imports subtract from GDP.

But if so, he's gravely mistaken.

4/Imports actually don't count in GDP one way or another.

GDP is a measurement of how many goods and services are PRODUCED WITHIN A COUNTRY'S BORDERS, and imports are produced ELSEWHERE.

research.stlouisfed.org/publications/p…

5/"But wait, Noah!!", you may be shouting. "I learned that Y = C + I + G + NX, and imports subtract from NX!"

Well, here's how it works. Imports subtract from NX, but ADD to C+I+G, since imports are either consumed or invested.

So overall they don't count in GDP.

See??

6/One more time for the folks in the back watching anime on their iPads:

7/So why was growth so fast in the first quarter?

Answer:
A) It wasn't actually THAT fast.
B) All the stuff that adds to GDP - consumption, investment, exports, government spending - grew at a pretty steady pace.

8/At this point, someone in the back of the class is waving his hand, dying to ask: "But Noah, even though imports don't SUBTRACT from GDP, surely they AFFECT GDP? Surely imports substitute for domestic production??? Surely, if we reduce imports, domestic production will rise???"

9/Well, in fact, this is a real possibility.

It's THEORETICALLY possible that cutting off imports of, say, washing machines would cause American washing machine factories, long idle, to spring to life and start rolling out product, in order to fill the gap.

But is this LIKELY?

10/Well, there are a number of reasons to think it ISN'T likely.

First, in order for a drop in imports to boost U.S. production, we'd probably have to have idle resources - unemployed workers, idle factories - ready to go.

In a big recession, that is really the case. But now??

11/Surely there are still a few unemployed people in the U.S. who would like some jobs.

But unless we're in the middle of a big recession, there are unlikely to be a bunch of idle factories standing by ready to produce the things that Trump has put tariffs on.

12/In the meantime, tariffs are raising prices for U.S. consumers.

That's probably going to make them cut back a little bit.

That effect exerts a drag on overall U.S. GDP.

bloomberg.com/news/articles/…

13/And there's another, even more powerful reason why Trump's tariffs are likely to hurt U.S. GDP instead of help.

Most of his tariffs are falling on intermediate goods and capital goods - things U.S. companies need in order to produce things!

14/When you cut off the supply of intermediate inputs and capital goods, you make it harder for U.S. manufacturers to manufacture.

That's going to hurt GDP.

15/So to sum up:

1. Imports DON'T subtract from GDP.

2. Unless we're in a recession, cutting off imports probably doesn't cause idle producers to spring to life.

3. Cutting off imports hurts GDP by lowering consumption and by making intermediate & capital goods more expensive.

16/So everyone who thinks that Trump's tariffs might be giving GDP a boost should think again.

(end)

bloomberg.com/opinion/articl…