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Businessweek Archives

Imports And Gdp: A Recount

Economic Trends


Trade experts have been troubled by the tendency of Americans to spend discretionary-income gains on imported goods--like Japanese cars and Korean VCRs. Indeed, the conventional economic calculation is that every percentage-point rise in America's gross domestic product generates a 2.5% surge in import demand. This link is why economists fret that much of the windfall consumers may realize from congressional tax cuts in 1995 will end up in the pockets of overseas producers.

Maybe not. The presumed correlation between changes in GDP and imports may be overstated, according to a National Bureau of Economic Research paper by University of California at Davis economist Robert C. Feenstra and International Monetary Fund economist Clinton R. Shiells. They suggest that a percentage-point hike in GDP lifts demand for foreign goods by a more modest 1.7%.

The authors say the government is relying on a flawed methodology for compiling its import data. In particular, import price indexes constructed by the official statisticians don't adequately take into account changes in what Americans buy from foreign suppliers. The government doesn't include new varieties of products offered at lower prices. (This argument parallels most economists' belief that the consumer price index overstates the annual inflation rate by at least 0.5 percentage points.) The result: America's terms of trade with other nations may have been better than reported and the benefits of trade underestimated.BY DEAN FOUST

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