Why Shouldn’t We Subtract the Added Value from Imports from the Trade Deficit?

Understanding the Impact of Imports on the US Economy

A loyal reader, Alan Goldhammer, recently raised thought-provoking questions about the role of imports in the US economy. His inquiry delves into the value that imports bring and how they contribute to economic growth.

Alan pondered, “Any small business that brings in Chinese products to sell adds value by creating jobs and generating revenue for the government. Shouldn’t this added value be considered in the trade deficit calculations? Doesn’t this value also boost the US GDP?”

In response to Alan’s queries, it’s essential to dissect the multifaceted impact of imports on various economic entities. While the calculation of reciprocal tariffs may be contentious, Alan’s focus on the value created by importing goods is pertinent.

Alan astutely highlighted the value chain initiated by small businesses importing Chinese products. These transactions not only contribute to government revenue through taxes but also create employment opportunities. However, it’s crucial to analyze these effects through an economic lens.

The revenue generated from selling imported goods primarily benefits the businesses engaging in trade. Their profit margins, determined by revenue minus costs, reflect the true economic gain. Similarly, job creation stimulated by imports should be evaluated based on the opportunity cost for workers, considering their alternative employment options.

Moreover, the ultimate consumers of these imported products play a pivotal role in the economic equation. Consumer surplus, defined as the difference between the maximum price consumers are willing to pay and the actual price paid, underscores the added value to society.

Addressing Alan’s inquiries directly:

The exclusion of this added value from the trade deficit stems from its monetary focus rather than value assessment. The trade deficit reflects the disparity between US spending on foreign goods and vice versa, emphasizing monetary flows over intrinsic value.

Alan’s intuitive questioning challenges the conventional narrative surrounding trade deficits. By recognizing the substantial value derived from imports, he prompts a reevaluation of their economic significance.

Regarding the impact on GDP, the increment in wages and salaries resulting from imports contributes to economic output. However, government taxes are not factored into GDP as they represent a redistribution of income rather than a creation of new wealth. Additionally, consumer surplus, a key component of value creation, is excluded from GDP calculations due to its nature as a non-market transaction.