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The role of imports in GDP—Gross Domestic Product—confuses many people. The current political discussion about tariffs has triggered some of the misunderstanding. This article aims to help business leaders understand what this critical economic indicator means, and the role that policy changes will play in the economic future. Any policy implications will be left to the reader.

GDP is an estimate of the value of the goods and services produced in the United States. It is not a comprehensive measure of well-being, nor is it the only critical indicator of the economy. However, it is the best single measure of whether economic activity is strengthening or diminishing. We economists look at GDP carefully, but we also look at a host of other indicators. The business leader with many other responsibilities should simply accept that GDP is a good, but not perfect, estimator. Later this article will explore other limitations of GDP, but now let’s get it the imports issue.

Because GDP estimates the value of production in the U.S., imports are neither added nor subtracted conceptually. Note that word “conceptually.” With perfect data, economic statisticians would totally ignore imports in calculating GDP.

However, the early economic statisticians faced two problems. First, they lacked comprehensive data on production. They did, however, believe that they could estimate spending. And spending should match production plus an adjustment for inventory changes (produced goods that were not purchased).

That led to the second problem. The readily available estimates of consumer spending, investment spending and government spending did not distinguish between expenditures on domestically produced goods and imported goods. The easiest solution would be to add consumer spending, investment spending, government spending and exports and then subtract total imports. That ended up measuring production as accurately as possible, but with confusion.

The confusion stems from subtracting imports. It’s as if imports hurt GDP. That’s not what the statisticians were saying. They simply wanted to back out all of the spending for imported goods they had already counted.

So the simple answer is that the calculation only subtracts imports because the spending estimates include imports. Everyone agrees that imports should not be counted in measuring domestic production.

Our data are now much more extensive than in 1934, when Simon Kuznets first estimated U.S. GDP. Our statisticians could—and probably should—develop measures of consumer spending, investment spending and government (C + I + G) that only count domestically produced goods and services, so that no subtraction of imports would be needed. That might lessen the confusion.

A few other GDP issues should be noted. First, GDP is an estimate, not a measurement. Nobody really knows the underly data that sums up to GDP. We have estimates of the different components, some more accurate than others, but nobody knows precisely what GDP is. In fact, the estimates that are published every month will be revised in the future as more complete data become available.

Second, GDP is an incomplete measure of activity. My neighbor pays for someone to mow his lawn. That counts as GDP. I mow my own lawn. That’s not GDP. And if I bought illegal drugs (hypothetically speaking, of course), that would not count as GDP, though my legal drug purchases do count. So we miss the underground economy as well as services provided by household members.

Most importantly, production itself is not what we want. Consumption is the goal of production. In a market economy, companies cannot stay business producing stuff that people don’t consume. That is markedly obvious looking at the data during World War II. GDP soared, leading some to think that war is good for the economy. But consumption dwindled. There was little available for consumers. People were definitely worse off, even those who did not go into battle.

Despite its limitations, GDP is a good indicator of economic activity, and imports do not reduce it.

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