# Do I make correct conclusions about international trade (and ways to increase GDP) from the expedenture approach formula for GDP?

(Please correct me if my reasoning is wrong somewhere)

Net Exports is a part of GDP and consequently its increase or a decrease also causes GDP to increase or decrease, assuming everything else stays equal. Higher import means lower Net Exports, while higher export means higher Net Exports.

Let's take two countries, country A and country C. Let's also assume that all internatinal trade happens between these two countries. If country C will increase its exports to country A, then GDP of country C, assuming everything else holds equal, will increase due to increased Net Exports part of its GDP equation. While for country A its GDP will decrease due to its decreased Net Exports.

From this it seems logical to conclude two things:

1.International trade is a zero-sum game from point of view of increasing/decreasing GDP.

2.If we want to increase our GDP, then among other things we must consider decreasing our import and increasing our export. For an example, we could outright ban some of foreign goods or raise tariffs, thus forcing our population to decrease consumption of foreign goods, this way increasing our GDP.

The only problem I see so far is that in the real world such policies can lead to trade wars, with other nations banning goods from our country and rasing tariffs on our goods, thus hurting our exports.

Your conclusion would be correct in pure endowment economy where there is no production $$Y(L) =0$$ (assuming only labor as factor of production) and everyone has the same endowments. In an endowment economy where there is no production and GDP is just dropped on both home and foreign country trade is indeed a zero sum game as $$M$$ subtracts from your endowment since $$Y=C+I+G+X-M$$ (Although its worth noting that in the long run trade must balance $$X-M=0$$ for reasons relating to exchange rate, savings, investments and movements of factors of production - but since it is not directly related to your question I wont go in depth into that)

However, real life economies are not pure endowment economies. Production and output $$Y$$ depend on how efficiently we can produce output. In real life trade allows countries to produce more i.e. have higher $$Y$$ and thus GDP than without trade.

Consider simple Ricardian model where you have 2 countries utopia and neutopia. Both have 100 labor $$L$$ avaiable. Assume there are two products wine $$w$$ and cloth $$c$$. Utopia can produce 1 unit of $$w$$ for 2 units of labor and 1 unit of $$c$$ for 1 unit of labor and neutopia $$1w$$ for $$1L$$ and $$1c$$ for 2$$L$$. Now if they dont trade with each other and if they both split their labor supply equally between wine and cloth Utopia gets to consume $$25w$$ and $$50c$$ and neutopia $$50w$$ and $$25c$$. Now if instead of autarky they decide to trade and Utopia will specialize only in cloth it can produce $$100c$$ and Neutopia if it specializes in wine can produce $$100w$$. Now both countries can trade lets say 50 units of wine for 50 units of cloth and now both countries have $$50w$$ and $$50c$$. Both countries expand their production possibility frontiers by engaging in trade and trade is not zero sum as both countries are better off.

Hence, as a result of comparative advantage $$Y$$(trade) > $$Y(autarky)$$. So once you allow in the identity $$Y=C+I+G+X-M$$ the output $$Y$$ to be increasing function of country's PPF its not correct to say that trade is zero sum game.

Of course, in a classroom setting its fine to apply national identity just to some pure endowment economy where your zero-sum conclusion about trade is correct. Or you could even allow for some production function but assume all countries have exactly same production function and exactly same resources endowments and there can be no economies of scale etc. where there is no reason for trade. But you are making a mistake by using a simple identity that ignores comparative advantage, factor endowments etc. and just making conclusions about international trade in real world.

• NFFI is net foreign factor income how that gets substracted? No GDP will be 10 because consumption would be 10\$ assuming nothing else beside the rock is sold – 1muflon1 Jan 1 '20 at 12:42
• 1. Even if you would sell it abroad it would be export not NFFI, NFFI is difference between GNP and GDP. For it to be NFFI you would have to have factory abroad. 2. selling the rock itself does not mean service or good is created. You just found the rock you did not really produced it. Of course you can always argue that picking it from ground is labor and production, but thats the same as telling math teacher that real triangles dont exist as in real world it is impossible to get straight line so pytagoras theorem does not apply... – 1muflon1 Jan 1 '20 at 12:50
• @user161005 1 exports are positive on GDP so it would be still 10. 2. In real life pure endowment economy is impossible like triangles or spheres or squares are impossible endowment economy can only exist in theory. Of course retail ads value although I would not call selling one rock on eBay retail but regardless that value added by retail would be some extra cost that you would charge for handling the good as a markup on top of it’s cost. – 1muflon1 Jan 1 '20 at 13:49
• This is fallacy. You are using outdated labor theory of value. Let’s suppose I gift you Rembrandt for a free. Does that mean it has 0 value? Would you not be able to sell Rembrandt on eBay for millions of euros? The value is subjective not objective just because you got the rock for free it does not mean to someone it might not have any value. If you pick up diamond from some open ground deposit it’s an valuable endowment – 1muflon1 Jan 1 '20 at 14:10
• @user161005. No for example Berries have to be picked up with labor. This being said when you are explaining an endowment economy picking up sticks or stones is probably closest you can get to it if you ignore that little bit of labor involved there. Also just because endowment economy is not real it does not mean it’s not a good analytical tool for some situations. In economics we sometimes on purpose want to assume that production is just given to turn of any general equilibrium effects on labor etc – 1muflon1 Jan 1 '20 at 15:01

Both of your conclusions are correct. For #2, however, your example might have left something out.

Consider a country that could not produce wine. By banning imports of wine, the country's net export would increase (a decrease in imports). However, this will also mean a reduction in consumption of wine as well. In fact, the increase in net exports of wine would be canceled out by the decrease in consumption of wine.

You could then argue that, since people have more money to spend since they're not buying wine, they could consume other things. This would increase the GDP as long as the "other things" they consume have some domestic value added.

The thing to keep in mind is that import is taken into account into the GDP calculation only to "take away" things that are not produced domestically. Personally, I think it's more straightforward to think about the import content of things you consume (or that the government spends). If you want to increase GDP, consume/spend more on goods that are produced locally. This would in turn lower imports. Thinking of it the other way around might be a bit misleading.

• But if international trade is a zero-sum game for GDP, then why would countries trade in the first place? Trading is supposed to be voluntary, it's irrational to engage in trade if you suffer from practicing it. Either countries would prefer autarky or export goods, while importing nothing. – user161005 Dec 29 '19 at 17:59
• The goal of a country, though, is not too maximize GDP. If you want to consume something you couldn't produce, you need to import it. Also, there's a concept called gains from trade and comparative advantage where both countries produce stuff they're best at producing and trade. You could learn more about that here. – Art Dec 30 '19 at 1:18