Importance of Imports

It is standard analysis to see real and nominal imports as a share of GDP quoted to estimate the importance of imports in the economy. Currently that shows nominal imports are about  15% of GDP and real imports are some 18% of real GDP.

But I suspect that this comparison understates the role of imports in the economy because services are some 45% of GDP but only about 16% of imports.  As my high school algebra teacher was fond of saying, you are adding crabs and apples. Rather, you should compare real goods imports to real goods GDP. On this basis imports are some 46% of GDP, a much larger share than standard analysis shows.  (second chart fixed….Dan)

This impacts the economy through two routes.  One, import prices are frequently the marginal price that establishes a price ceiling for domestic goods.  But this is how tariffs work. At current prices domestic producers are making all they can profitably market at this price.  Tariffs, by raising the price ceiling facing domestic producers allow them to raise prices and still displace imports

The second role of imports is as a buffer when the economy is stuck with higher ( excess ) stocks.  Traditionally, excess stocks or inventories leads to falling production as the means of getting inventories and sales back into line.  But in today’s economy excess inventories are just as likely to lead to lower imports rather than lower production.  See how imports share of goods GDP fell in the last two recessions as compared to the 1980 and 1990 recessions.

However, imports are subtracted from GDP in the national accounts so lower imports actually add to GDP growth. This is a significant factor behind the point that recessions have become less frequent in recent decades.  Largely because of this I suspect that economists are jumping the gun in calling for a recession in the near term.   We are more likely to see just plain economic stagnation rather than a recession.  In a way this may be the bearish scenario, as recessions contain the seeds of their own recovery while it is hard to see what would end simple stagnation.

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