Friday, November 13, 2009

Letter from Chad the budding economist 

Chad writes by email:
I've been meaning to ask you for a while about the way that imports impact GDP. If Americans stop buying as much stuff at Wal-mart, imports go down which means GDP looks better. But few would take that as a positive sign.
That question is a principles question. If I import a bottle of French wine to drink (say, some of that nice Beaujolais Nouveau coming in next week), it increases consumption, the largest part of GDP. Since GDP is gross domestic product, I have to deduct that consumption I do which is not from a domestic producer. So I subtract imports. So if people "stop buying as much stuff at Wal-Mart" and save the money, there's no effect at all on GDP. If I decide not to buy the beaujolais but celebrate the end of the harvest with Nebraska nouveau instead, then GDP expands.

Likewise in this article Chad sends me. If I buy a car with more American components in it, GDP is more greatly affected than not. But who cares? In 1992 we passed a law, the American Automobile Labeling Act, which required new cars to have stickers indicating how much of the car's components and assembly was off-shored. A government agency in 1998 interviewed 646 car purchasers to see what difference it made to them. Only 23% even knew of the stickers, 15% of them had seen one, and only 5% said it made any difference to them at all. (2% said it made a moderate or large difference.)

Chad closes by asking if we place too much stock in GDP as a measure of an economy's health. I certainly think there's an argument there, but most of the alternatives presented seem to be even more fraught with problems than GDP. Here's the U.S. government's 'celebration' of GDP. I'd encourage those interested to read Bryan Roberts' paper in our book for some of the critiques and counter-critiques.