Are Imports Subtracted From GDP?
Economists Fight
I want to address a heated debate currently raging in economic circles that exemplifies how poorly communicated technical details can create confusion, even among professionals.
The Import Subtraction Controversy
The recent GDP report showed a contraction, with the Bureau of Economic Analysis citing "an increase in imports" as a primary factor for the decrease. This seemingly innocent statement has ignited a firestorm of debate among economists about how imports are actually included in the measurement of GDP.
Some economists have taken to social media, creating memes and posting comments suggesting their colleagues don't understand that "imports aren't subtracted from GDP." The controversy has grown to the point where it's creating confusion within academic circles and among policymakers, investors, and students.
I'm here to set the record straight.
Yes, Imports ARE Subtracted in the GDP Formula
If you look at the standard GDP identity taught in every principles course, it's written as:
Where:
C = Consumption
I = Investment
G = Government spending
X = Exports
M = Imports
In this accounting identity, imports (M) are explicitly subtracted. This isn't a theoretical debate or a matter of opinion—it's the actual formula used in national accounting.
But Why Are Imports Subtracted?
The reason imports are subtracted is twofold:
GDP measures domestic production: By definition, imports represent production that occurred outside our borders, so they should not be counted in our domestic production.
To avoid double-counting: This is the crucial point that creates confusion. When an imported good enters the country, its value is already embedded in either consumption (C) or investment (I), particularly in inventory investment, which was significant in the latest GDP report.
For example, if a retailer imports $10 million of electronics from abroad, those goods might initially show up as an increase in business inventories (counted in I). Later, when consumers purchase those electronics, they'll be counted in consumption (C), with a decrease in inventories (I). If we didn't subtract imports, we would be double-counting this economic activity that wasn't produced domestically.
A Clarifying Example
Let's imagine a simplified economy where:
Consumers spend $100 (C = $100)
Businesses invest $50 (I = $50)
Government spends $30 (G = $30)
We export $20 worth of goods (X = $20)
We import $40 worth of goods (M = $40)
If we apply the GDP formula: GDP = $100 + $50 + $30 + $20 - $40 = $160
The $40 subtraction for imports doesn't mean imports reduce our economic well-being—it simply accounts for the fact that some of the consumption and investment spending ($100 and $50) was for foreign-made goods and services, which shouldn't count in our domestic production measure.
The Communication Problem
The debate occurring now reveals a deeper issue within economics: our inability to communicate technical concepts clearly to broader audiences. When we teach GDP, we present the formula with imports being subtracted. But then, some economists object when this exact formulation is used to explain GDP movements in the real world.
This inconsistency creates confusion, not just for students and the public but also for some economists. When economists publicly contradict each other on fundamental concepts, it undermines confidence in the profession's expertise.
Why This Import Surge Is Particularly Concerning
The recent increase in imports highlighted in the GDP report isn't just an accounting issue, it reflects a concerning economic dynamic created by anticipated trade policy changes. I wrote about this in another article. (What does the latest GDP data tell us about demand shifts and inventory buildup?)
First, the surge in imports appears to be primarily defensive rather than reflective of strengthening domestic demand. Businesses rush to import goods before tariffs take effect, creating an artificial spike in foreign purchases. This behavior distorts normal trade patterns and business investment decisions.
Second, this import acceleration has contributed to an unusual inventory buildup. Unlike typical inventory accumulation that signals anticipated consumer demand, this stockpiling represents businesses hedging against future price increases. When inventories accumulate for defensive reasons rather than in response to expected sales growth, they often lead to future production cutbacks once the stockpile is sufficient.
Third, the resources directed toward accelerated importing and inventory stockpiling may be diverting capital away from more productive long-term investments. Businesses focusing on tariff avoidance might be postponing investments in capacity, technology, or workforce development that would enhance productivity and growth.
Finally, this pattern creates a particularly challenging environment for policymakers. The Federal Reserve faces accelerating inflation (with the PCE price index jumping to 3.6 percent from 2.4 percent) alongside contracting GDP—the classic stagflation dilemma. Raising rates to combat inflation could further depress already negative growth, while maintaining accommodation risks entrenching inflation expectations.
Highlighting the increase in imports is critical in our analysis of the state of the economy. Saying that it “decreased GDP” is not accurate, but noting the increase in imports as an item of interest is justified.
The Takeaway
GDP measures domestic production. Using the expenditure approach to calculate GDP, we use spending to measure this production. Since some spending goes toward foreign-made goods, we must subtract imports to avoid counting non-domestic production.
The pattern we're seeing—accelerated imports, defensive inventory accumulation, and rising inflation amid slowing growth—resembles the early stages of policy-induced economic distortion. These distortions often resolve through more painful adjustments down the road, as artificially pulled-forward demand creates a subsequent vacuum and bloated inventories lead to production cutbacks.
We economists must move beyond the technical debate about how accounting identities handle imports to focus on the substantive concerns. When we get lost in esoteric arguments about accounting methods, we miss the forest for the trees and fail in our responsibility to highlight genuine economic risks. The rise of imports is a concern and represents an inefficient use of resources, a deadweight loss.
Stay informed,
Dr. A
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Share the Knowledge: If you found this explanation valuable, please forward it to colleagues and classmates who might be confused by the recent debate about imports in GDP calculation. A clear understanding of economic fundamentals is essential for interpreting economic data accurately.
I definitely have been a weing this a lot more. I not surprised though sadly there are a lot of lay men that think they deeply understand economics but dont know the logic behind basic principles. There is a definite need to improve economic literacy.
Abdullah- You are of course absolutely correct. But... (sorry to point out the big complication) when parts are made inside the US, they are not included in GDP, because they are part of a later complete unit sold to end-users. HOWEVER, when parts are imported, they are counted as imports -- they are added to Consumption if they become part of a product sold in the same year, or to Investment if they are added to inventory but not put in a product that is sold in the same year -- then they are subtracted as part of Net Exports (imports minus exports). Now this makes sense on the face of it, because the part is a foreign-made portion of a product. But, one thing is the sheer volume of parts imported to the US. Since globalization and very low tariff levels, the volume of parts imported to the US has accelerated. Here is a site that shows car parts by source country: https://automotiveaftermarket.org/automotive-parts-imports-country/#:~:text=Top%20countries%20for%20automotive%20parts,Japan%20US%2415%2C796%2C292%2C742%20(8%25). But here is the problem: "Automobiles and their parts rarely cross the U.S. border once. Parts like engines, transmissions, or other automotive components potentially crossing the U.S.-Canada and U.S.-Mexico borders up to seven or eight times before being assembled into a finished vehicle." (https://www.csis.org/analysis/stacking-effect-trump-administrations-auto-tariffs) The result is that "imports" can be counted up to 7 or 8 times! That plays Hell with trade stats. It doesn't really matter so much if tariffs are zero or negligible, but it is possible that this could lead to the impression that we are nominally in a recession because of high "Imports", when all we are doing in practice might be counting the same engines multiple times and duly subtracting each iteration from GDP...