How Artificial Intelligence Could Widen the Gap Between Rich and Poor Nations

By Cristian Alonso, Siddharth Kothari, and Sidra Rehman New technologies like artificial intelligence, machine learning, robotics, big data, and networks are expected to revolutionize production processes, but they could also have a major impact on developing economies. The opportunities and potential sources of growth that, for example, the United States and China enjoyed during their […]

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Chart of the WeekHow a Collective Infrastructure Push Will Boost Global Growth

By IMFBlog With vaccines around the corner, there is increased hope that the pandemic could soon be under better control. That said, the need for cooperative efforts to work toward a better future has never been greater. Priority areas relate to the need to produce and distribute vaccines globally, tackle climate change, and bolster the […]

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Time is Ripe for Innovation in the World of Sovereign Debt Restructuring

By Peter Breuer and Charles Cohen When corporations have too much debt and need to restructure it, creditors often end up exchanging bonds or loans for stocks. They trade the guaranteed payout of a fixed-income investment for an equity position whose return depends on the company’s future results. In other words, investors accept to share […]

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Chart of the WeekThe Crisis is Not Over, Keep Spending (Wisely)

By Oya Celasun, Lone Christiansen, and Margaux MacDonald The pandemic-induced economic crisis is set to leave deep scars. Human capital erosion from prolonged high unemployment and school closures, value destruction from bankruptcies, and constraints on future fiscal policy from elevated public debt top the list. Groups that were already poor and vulnerable are set to […]

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How COVID-19 Will Increase Inequality in Emerging Markets and Developing Economies

By Gabriela Cugat and Futoshi Narita Emerging markets and developing economies grew consistently in the two decades before the COVID-19 pandemic hit, allowing for much-needed gains in poverty reduction and life expectancy. The crisis now puts much of that progress at risk while further widening the gap between rich and poor. Despite the pre-pandemic gains in […]

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Europe Needs to Maintain Strong Policy Support to Sustain the Recovery

By Alfred Kammer The pandemic is exacting a heavy toll on Europe. More than 240,000 people have lost their lives. Millions have suffered the illness themselves, the loss of loved ones, or major disruption in their work, their businesses, and their daily lives. The economic impact of the pandemic has been enormous. Our latest Regional […]

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Imports as a “Drag on the Economy”

A Wall Street Journal story of last week, “The Verdict on Trump’s Economic Stewardship, Before Covid and After,” makes many good points. It also falls into some popular economic errors. Here is an obvious one:

Trade itself turned out to be a drag on the economy. U.S. export growth slowed starting in 2018 as Mr. Trump’s tariff battles ramped up. The U.S. trade deficit, reflecting an excess of imports over exports, grew to $577 billion in 2019 from $481 billion in 2016.

We are told that imports or a trade deficit necessarily constitute “a drag on the economy.” This elementary error stems from the misunderstanding of a national-accounting identity: GDP = C + I + G + X – M. This identity is often misunderstood as meaning that M (imports) constitutes a “drag” on GDP because it subtracts from GDP measured as the sum of personal consumption expenditures (C), gross private investment (I), government expenditures for goods and services (G), and exports (E).

I have blamed the Wall Street Journal and other journalists before for repeating this myth: see my Regulation article, “Are Imports a Drag on the Economy,” Fall 2015. Perhaps one can find a serious economic argument to the effect that imports reduce GDP—although I and most economists since David Hume, Adam Smith, James Mill, or Jean-Baptiste Say don’t think so. But if such a serious argument exists, it is not that the trade deficit (X-M) subtract from GDP in an automatic, accounting, arithmetical manner as some people imagine is shown by the accounting identity above.

The demonstration is simple. National statisticians (the Bureau of Economic Analysis in the United States), in one of their ways of measuring GDP (from the expenditure side), subtract M because it is already included in their measures for C, I, and G. Consumption expenditures, as measured in the national accounts (in the United States as elsewhere) already incorporate imported consumption goods; investment expenditures already incorporate imported capital goods; and government expenditures already incorporate imported goods and services (foreign consultants, for example). Why do statisticians subtract M? Because imports, by definition, are not part of GDP (gross domestic product) and must not be included in any measure of the latter. M cannot reduce the measure of GDP because it is not part of it.

For another statement of my argument, see my “A Glaring Misuse of GDP,” Regulation, Winter 2016-2017. In still another Regulation article (“Peter Navarro’s Conversion,” Fall 2018), I summarize and illustrate the argument:

Imports have to be removed because they are not part of GDP, which is gross domestic production. … Think about the guy on the scales who subtracts 1 lb. to factor in the weight of his shoes; his weight doesn’t change if instead he subtracts 2 pounds because on that day he is wearing heavier shoes. Likewise, American output doesn’t change because more imports are both added and subtracted.

An economist with the Federal Reserve Bank of St. Louis, Scott Wolla also pointed out this misleading error: I reported on, and linked to, Wolla’s article in another Econlog post: “The St. Louis Fed on Imports and GDP,” September 6, 2018.

Many former college students who took a macroeconomic class and glanced at the accounting identity GDP = C + I + G + X – M in a (perhaps not so good) macroeconomic textbook make the same error. The Wall Street Journal should not.


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Building an Inclusive Recovery in the Middle East and Central Asia

By Jihad Azour and Joyce Wong Countries in the Middle East and Central Asia face with COVID-19 a public health emergency unlike any seen in our lifetime, along with an unprecedented economic downturn. The pandemic is exacerbating existing economic and social challenges, calling for urgent action to mitigate the threat of long-term damage to incomes […]

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A Long, Uneven and Uncertain Ascent

By Gita Gopinath The COVID-19 pandemic continues to spread with over 1 million lives tragically lost so far. Living with the novel coronavirus has been a challenge like no other, but the world is adapting. As a result of eased lockdowns and the rapid deployment of policy support at an unprecedented scale by central banks […]

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Finding the Right Policy Mix to Safeguard our Climate

By IMF Staff Unaddressed, climate change will entail a potentially catastrophic human and economic toll, but it’s not too late to change course. Global temperatures have increased by about 1°C since the pre-industrial era because of heat-trapping green-house gases accumulating in the atmosphere. Unless strong action is taken to curb emissions of these gases, global […]

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