Why Imports Depreciative Effect on GDP may be Misleading

Australia's economy has suffered heavy macroeconomic consequences in the wake of COVID-19, going into recession for the first time in over thirty years back in June 2020. Gross Domestic Product fell a staggering 7 percent in the June quarter, and that plummet has only recently eased. The lack of disposable income within the economy resulting from, among other things, record unemployment rates has seen consumer demand and thereby macroeconomic consumption drop enormously. This article delves into why judging imports merely based on the basic GPD functions may be misleading, and outlines the effect of this in our current abnormal economic state. 


Australia Imports - 2011 to 2021


Function of GDP and is misleading effects concerning imports

Whilst there are a plethora of ways to define GDP, it is widely accepted that Real GDP (Y) is derived from:

Y = C + I + G + (X - M) = AD

where C = Consumption; I = Investment; G = Government Spending; X = Exports; M = Imports

Consequently, it is obvious that any increase in imports (M) will, ceterus paribus, have a depressive effect on Real GPD and Aggregate Demand given it decreases net exports (X - M). Interestingly, whilst this may be theoretically true, increased imports certainly does not have any mandatory adverse effect on economic growth; it is often quite the contrary and high imports are likely indicative of increases in consumption, investment and government spending. 

There are strong correlations between importing goods and a business's increased productivity, particularly with respect to machinery (the bulk of All Imports' products). This is due to multiple reasons: first being that additional units of machinery will result in more jobs being able to be completed quicker, second as such an increase in work has a "knock-on" effect in climbing positively on the x-axis of the Economies of Scale model, closer to the Minimum Efficient Scale. This model describes diminishing requirements for resources for every unit produced or dollar made with respect to the increase of resources (whether that be labour, machinery, etc.).


Economies of Scale and MES

Coming soon... 


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