I’m afraid that I found “The Quiet Driver of Economic Growth: Exports“, a NYT Economix post by Binyamin Appelbaum, to be more confusing than illuminating. In this post, I’ll try to explain why one must be careful in interpreting a number of economic statistics.
The estimates of the nation’s economic performance last year, released Friday, highlight a striking trend: Exports have never been more important.
Foreign buyers purchased more than $2 trillion in goods and services, the first time exports have topped that threshold. And those exports accounted for almost 14 percent of gross domestic product, the largest share since at least 1929.
We usually talk about exports alongside its opposite number, imports, and since the United States buys much more than it sells – our “trade deficit” — the general impression is that foreign trade is a drag on the economy. But that tends to obscure the importance of exports, which have accounted for about 10 percent of G.D.P. over the last two decades and, since the recession, considerably more…
Much of the rise in exports is a consequence of domestic problems… This is a good thing on the whole. The ability of American companies to make money in foreign markets is helping to offset the pain of those domestic problems.
I found this confusing in three senses:
- In purely accounting terms, GDP depends on net exports, not gross exports.
- In compositional terms, the export-GDP ratio doesn’t tell you if international commerce is offsetting domestic problems.
- The key phrase “exports accounted for X% percent of GDP” is meaningless at best and misleading at worst.
To the extent that gross domestic product is our measure of economic performance, should we think about net exports or gross exports? Recall the expenditure definition of GDP:
Y = C + I + G + X – M
If you want to talk about — in accounting terms, not causal terms — what’s happening to US GDP, then net exports are informative. They appear on the right-hand side. When you talk about gross exports while holding gross imports constant, you are losing information. If X and M both increased by the same amount, then GDP would not increase, but X/GDP would rise.
Suppose that I were describing a firm’s economic performance to you. If we had an accounting definition of our performance that said
corporate profits = revenues – costs,
would the following claim seem reasonable? “We usually talk about revenues alongside their opposite numbers, costs, and since the company buys much more than it sells — our ‘negative profits’ — the general impression is that doing business is a drag on the firm. But that tends to obscure the importance of revenues, which have accounted for 110 percent of (the absolute value of) net profits…”
If you care about the international component of GDP, you are losing information when you switch from looking at net exports to solely considering exports. If you look at the BEA press release, you learn that real exports grew 4.7% and real imports grew 4.4%. But recall that we run a trade deficit, so real imports are growing from a larger base. If we go to table 3 of the full BEA announcement (pdf), my reading is that net exports moved from -$562b in the third quarter to -$582b in the fourth quarter. If I’m reading the table correctly, then net exports actually fell. That means that the way we usually talk about trade, which looks at net exports, tells you something different than what is implied by looking at gross exports (implicitly holding imports constant).
Are exports offsetting domestic problems?
Exports as a share of GDP is a ratio. If exports stay the same while GDP shrinks, the exports-to-GDP ratio will rise. Is that a sign of exports offsetting domestic problems? I suppose that it is if the counterfactual is that exports would shrink at the same rate of GDP. But if net exports actually fell, then the increase in the trade deficit “reduced” US GDP (in accounting, not causal, terms), so exports/GDP seems like the wrong statistic to study.
What do exports “account for”?
Applebaum writes that “exports accounted for almost 14 percent of gross domestic product” and that we’ve negleted “the importance of exports, which have accounted for about 10 percent of G.D.P. over the last two decades.” I do not know what the phrase “accounts for” means in these statements.
It’s true that Y = C + I + G + X – M, so exports are a component of GDP. But when I read “accounts for”, I imagine a decomposition of GDP into pieces that sum to 100%. That’s not true when you talk about gross exports. We’re back to the distinction between gross values and value-added measures that I have repeatedly emphasized. What would it mean to say that “exports account for 223% of Hong Kong’s GDP“?
I would suggest that exports/GDP is meaningless as a measure of how international commerce has benefited the US economy during the last quarter. At worst, the “accounts for” language might cause readers to interpret the measure as representing a decomposition of GDP’s components.
Be careful with economic statistics! There are important differences between gross exports and net exports and between gross value and value added.
I’ve tried to be careful here, but I may have read Applebaum’s post or written my post too quickly, so if I’ve made an error in handling statistical definitions or the BEA data, please point it out in the comments. Thanks!
I’ve tried to write carefully, but there’s a danger that readers might think I’m treating “net exports” as a scorecard for US economic performance. I am certainly not saying that exports are good and imports are bad. Remember that the current account deficit is the amount by which domestic investment exceeds domestic savings. These outcomes are jointly determined in general equilibrium. My story about “net profits” was an accounting analogy, not an economic analogy.
Addendum (28 Jan, 12pm): Here’s my Twitter exchange with Appelbaum. It doesn’t change anything I said above.