A question on the imports effect on GDP - conceptually, wouldn't higher imports lead to a drop in consumption of domestically produced goods? As consumers are going to buy a fixed amount of goods at the end of the day.
Hi Param, thanks. You are assuming that all imports are final consumer goods, which isn't the case. A significant portion of imports is for machinery and other intermediate goods essential for producing goods domestically. Conceptually, higher import tariffs are leading to 'deadweight loss' - some of the domestic goods just aren't economically feasible and hence not in the market because the intermediate goods become costlier. Hope this helps. Cheers.
Oh alright - so is it also important to analyse whether GDP growth stemmed from -
1. Increase in consumption of goods similarly priced
2. Or from higher priced goods (as a result of inefficiently produced domestic goods because of import substitution)
So inflation would capture the increase in prices, but by reading inflation figures, I dont think the cause can be identified (switch to domestic manufacturers or general rise in prices).
Hi. As always, enjoyed reading it!
A question on the imports effect on GDP - conceptually, wouldn't higher imports lead to a drop in consumption of domestically produced goods? As consumers are going to buy a fixed amount of goods at the end of the day.
Hi Param, thanks. You are assuming that all imports are final consumer goods, which isn't the case. A significant portion of imports is for machinery and other intermediate goods essential for producing goods domestically. Conceptually, higher import tariffs are leading to 'deadweight loss' - some of the domestic goods just aren't economically feasible and hence not in the market because the intermediate goods become costlier. Hope this helps. Cheers.
Oh alright - so is it also important to analyse whether GDP growth stemmed from -
1. Increase in consumption of goods similarly priced
2. Or from higher priced goods (as a result of inefficiently produced domestic goods because of import substitution)
So inflation would capture the increase in prices, but by reading inflation figures, I dont think the cause can be identified (switch to domestic manufacturers or general rise in prices).
Hope I'm making sense here.