DSGE
VIP Member
- Dec 24, 2011
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How do imports reduce the GDP?
You're kidding right?
No. GDP is gross domestic product. It measures the amount of stuff produced domestically. Buying things produced internationally doesn't lower the amount produced domestically unless you fall into the mistaken line of reasoning that "those dollars being spent on imports are now not being spent on domestic goods". That line of reasoning is entirely absurd. Dollars sent overseas to pay for imported goods come right back into the country. You think people accept dollars as payment only to stick them in a drawer and never use them. That would be awesome, since then we could just print money and keep buying up everything produced internationally at no cost. No. People only accept dollars as a means of payment if they either A) plan to purchase US goods with US dollars, since you can't go to a Chinese supermarket and pay for milk with US dollars (even if you could the Fed would just increase the money supply); B) plan to sell US dollars to somebody in exchange for your local currency, in which case, who's gonna buy US dollars if not to inevitably buy US goods?
This is reflected in the fact that the trade deficit is always equal in magnitude but opposite in sign to the capital and financial account surplus. A trade deficit means capital is flowing into the US. And so, trade deficits do not lower the amount produced domestically.
In fact you can make the argument that they have the ability to increase GDP if you're importing goods which increase the productive capacity of the US.