Measuring Exports and Imports in GDP

Remember that exports are goods and services produced domestically but sold abroad

And, imports are goods and services produced abroad but sold here.

Because imports are produced elsewhere, those goods are counted in that country’s GDP. So, a cell phone produced in China is counted in China’s GDP. They can’t be counted twice; that is, they can’t be counted in our GDP.

Let’s go back to our equation,

GDP = C + I + G + (X – M).

Now, let’s focus on the last part of the equation, the “X-M” part – that part is known as net exports, because it is the result of subtracting imports from exports.

You’ll notice in our equation, that all the numbers are added to form GDP, except M, imports. The M variable is subtracted from GDP because GDP measures domestic production – in fact “domestic” -- which means it was produced inside a particular country -- is in the name. Imports aren’t produced domestically, so subtracting them is necessary.

But, does buying an import, actually subtract from domestic production?

Actually no.

It’s important to realize that the “M” variable – imports – is there for accounting purposes. The imports part of the equation is there to subtract out goods that were originally counted as consumption, investment, or government spending, but were imported. We subtract them to make sure we aren’t including the value of imported goods in the GDP number.

Here’s an example, let’s say you buy a car produced outside the U.S., and that car cost $30,000. When you bought the car, it was added to GDP as “C” or consumption spending. Then, because it was imported, the $30,000 dollars is subtracted, so they cancel each other out. So, the net effect of buying an import is no change in U.S. GDP.

In other words, the M variable is there to make sure we’re only counting goods produced domestically. But make sure you notice that buying an import does not subtract from GDP.

Knowing this can be useful because many goods are not purely domestic. For example, let’s say you bought a $30,000 car that was assembled in the U.S. but used $5,000 in imported parts. In this case, the net effect on GDP is $25,000.

The net imports part of the equation is also helpful for discussing the balance of trade – comparing the value of the goods we export, to the value of goods we import.

If we export more than we import, the balance of trade is positive. If we import more than export, the balance of trade is negative. But don’t automatically assume that a negative trade balance is bad for the economy – there’s a larger story here that we don’t have time to discuss in this video.