Monday, April 28, 2014

No Edward, that's not how it works

Edward Hugh has returned to blogging. In his latest piece, the resident British expert on all things Spanish and economic has come to the splendidly silly conclusion that the principal impetus behind Spain's recently improving GDP is a decline in imports with respect to last year. A decline in imports.

In his own words:
Since imports were down by more than exports, net trade was positive and contributed an estimated 0.2 percentage points (or half) to growth. If imports had fallen by less, by say only 0.6%, then Spanish GDP would only have grown by half (0.2%), such are the quirks of GDP calculations.
With all due to respect, he's attributing  'quirks' to the wrong party.

The whole purpose of deducting imports from the GDP figure is to ensure that they have no impact whatsoever, neither positive nor negative, on the measurement of a country's economy. We'll let the BEA do the explaining:
The value of imports is already included in the other expenditure components of GDP, because market transactions do not distinguish the source of the goods and services. Therefore, imports must be deducted in order to derive a measure of total domestic output.
The effect that GDP methodology has on Hugh's observation can be set out pretty simply. If, as he proposes, imports were to have fallen 'say only 0.6%'  every last euro of whatever the corresponding amount might have been would have also shown up in one or another consumption category of the national accounts. Immediately removed by subtracting imports*,  their effect would have been.... zero. GDP would not have fallen, risen, moved sideways or gone for a swim in the Blue Lagoon.

Imports do not contribute to, or deduct from, GDP. They are not even counted. End of story. And all of that rise in Spanish first quarter is attributable to, mirabile dictu, increased economic activity.

*The main difficulty people have in understanding this simple relationship is that the economics profession often obfuscates it behind the irrelevant fact that two of the elements, exports and imports, of the GDP calculation also, in another context, produce the figure known as 'net trade'. 

The formula, typically expressed as C+G+I+X-M (X -M, coincidentally, being the trade balance) is a breeding ground for confusion. Writing it as ((C+G)-M)+I+X would probably make the real functions of everything here a bit more self-evident. But, honestly, we wouldn't expect a 'macroeconomist' to be fooled by this artefact.

Then again, it's not the first time (but the second or third) that Ed Hugh has had trouble coping with the relationship between the domestic and external sectors in the national accounts.

**The funniest part of the whole thing is there's now a whole cottage industry of Spanish commentators claiming that the government is doctoring import statistics - to the downside - in order to give a fake boost to GDP. The noise-o-sphere at its very finest.

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1 comment:

lottin said...

Yes, you seem to be right. What I find more worrying is the total absence of uncertainty measures in official statistics. The way the present the data, it makes it look like it's "a fact" that GDP has gone up by 0.5%. In reality, the GDP growth figure is an estimate and its actual value is pretty much unknown. It could be 0.9% or -1.2%.