Imports Arithmetic Doesn’t Explain GDP Drop

Suppose you measure something (say, GDP) in two steps: first, you add in some number (say, the value of imports); second, you subtract the same value. You may say, focusing on the second operation, that “imports are a subtraction in the calculation of GDP.” You may equally say, focusing on the first operation, that “imports are an addition in the calculation of GDP.” But if you consider the two operations together, the truth is that imports are not a part of GDP and thus neither decrease nor increase it: +A-A=0. The reason is that GDP is defined as the domestic production of final goods and services, which is the “D” in Gross Domestic Product.

In its press releases (including the release of April 30), the Bureau of Economic Analysis (BEA) chooses the second formulation instead of the first one or of both together. This focus is highly misleading and does not correspond to the bureau’s methodology and technical literature.

The total value of the final goods and services produced domestically in an economy (including capital goods and any increase in inventories) is, by definition, equal to total expenditures (including savings and what is produced but not sold during the period under consideration). In other words, looking at GDP from the expenditures side, we have the familiar equation:

GDP = C + I + G + X – M.

Forget M for the moment. The equation, which is an accounting identity, says that GDP must also be equal to the sum of consumption expenditures (C), investment expenditures (I), government expenditures (G), and exports (X), if none of these components include imports, for GDP is gross domestic product. In fact, each of these four variables (C, I, G, X), as statistically collected, does include imports. Consequently, the (separately calculated) total value of imports (M) must be subtracted to remove the imports from the total. Hence the formula above.

The equation is typically rewritten as its exact mathematical equivalent

GDP = C + I +G + (X – M),

mistakenly suggesting the false interpretation that the “net exports” or “trade deficit” (X – M) subtract something from GDP. The expert or the economics student who has taken a good college course of introductory macroeconomics knows that this interpretation is not correct. But the ordinary person or the superficial journalist or editor is easily misled. The false interpretation also provides the protectionist activists (like Peter Navarro, despite his Harvard PhD in economics!) with the invalid argument that imports reduce GDP.

The reader interested in further explanations and citations including to the BEA) will find several articles and posts of mine: “Gross Domestic Error in The Economist,” EconLog, May 28, 2019); “The St. Louis Fed on Imports and GDP,” EconLog, September 6, 2018; “Peter Navarro’s Conversion,” Regulation, Fall 2018; “Misleading Bureaucratese,” EconLog, October 30, 2017); “A Glaring Misuse of GDP,” Regulation, Winter 2016-2017, (p. 68) ; “Are Imports a Drag on the Economy?” Regulation, Fall 2015.

As you can verify, neither the Wall Street Journal nor the Financial Times has come to grips with this simple statistical fact. Very interestingly, and for the first time to my knowledge, The Economist has just shown that it understands: see “Don’t Blame Imports for the Fall in America’s GDP,” May 1, 2025.

It is important to distinguish between an accounting identity (such as the one discussed above) and an economic argument. The former is true by definition; the latter needs a valid theory and supporting evidence. It is difficult, if not impossible, to build a valid protectionist theory demonstrating that imports reduce GDP. Standard economic theory, on the contrary, can explain, among other phenomena, how a foreign war embargo or, equivalently, domestic tariffs or bans can hit production via imported inputs (inputs account for more than half of all imports in America).

According to the BEA’s advance estimate (which is nearly always revised as more data become available), the American GDP declined by 0.3% in the first quarter of 2025 compared to the last quarter of 2024, while imports increased by 41%.

One explanation for the coincidence of higher imports and lower GDP in Q1 is the frontloading of imports before President Trump’s tariffs hit. Consumers, intermediaries, and producers tried to beat the tariff deadlines. For example, car dealers increased their inventories of foreign-made cars (or those containing foreign-made parts) to satisfy the demand of their customers. The high maritime traffic between China and Los Angeles confirms the frontloading of many other imports. Responding to consumer demand, domestic production of substitutes could have been consequently reduced. But the phenomenon would soon be compensated by the (reverse) substitution of domestic for imported production as the tariffs come into force.

Another explanation is simply that the uncertainty and pessimistic expectations provoked by Trump’s protectionist intentions were sufficient to start a recession, which is defined as negative levels of GDP and their consequences in terms of unemployment, etc. We will learn more as events develop and new data become available, but not with the help of an accounting identity that says nothing about imports.

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ChatGPT took the initiative of adding a wall picture. It seemed to me that the person on the left looked like Adam Smith and the one in the middle like Karl Marx. I asked “him” about that and he confirmed. The one on the right, he said, is John Maynard Keynes. I decided it was not a bad idea and kept it, although such a picture would be unusual in a newsroom.