> [QUIZ: Who can spot the elementary, Econ 101 analytical error at the
> heart of this argument from a big-shot Euro economist?]
Gros wrote:
> The key problem is simple: until 2008, these countries enjoyed a long
> boom based on cheap and plentiful credit, which allowed them to
> finance large current-account deficits. But any import boom creates a
> misleading impression of the local economy’s productive capacity.
>
> Imagine a country that increases its imports of, say, cars and other
> consumer goods by 10% of its starting GDP. These goods are sold to
> local consumers via car dealers and a whole chain of traders and
> retailers. All of these intermediaries have costs that have to be paid
> by the local consumer, which flatters the national GDP statistics,
> because, technically speaking, all of these costs constitute value
> added in intermediation services. An import boom thus also leads to
> higher measured GDP growth.
>
> How large is the induced growth in GDP from higher imports? The retail
> price is often more than twice the wholesale price paid by the
> importer. The local value added to imports could thus easily equal
> their value. This implies that an increase in imports of consumer
> goods equivalent to 10% of GDP could generate an increase in measured
> GDP of about 10% as well.
>
> But the opposite is also true: when an import boom ends, measured GDP
> must drop considerably, because much less intermediation is needed.
> This fall in GDP, though a natural consequence of lower imports of
> consumption goods, is often mistakenly perceived as something to be
> avoided, because it seems to imply that output is below its “potential.”
This is such a freshman mistake: confusing the average *level* with the marginal *change*. Even if you accept his claim that $100 of imports are supported by $100 of local distribution activity *at a point in time*, it certainly doesn't follow that doubling imports to $200 will double distribution activity to $200. Given the fixed costs involved, it would be shocking if that happened.
What we're interested in is the *elasticity* of distribution activity with respect to imports -- not the static *ratio* of distribution to imports.
I looked at this in the U.S. data going back to 1940. In an average year, a 10% increase in final sales to domestic purchasers was associated with only a 0.8% increase in total employment due to job growth in distribution (retail+wholesale).
Even if you assume that distribution intensity is twice as high for imported goods as it is for domestic goods, the scenario Gros describes -- a 10%-of-GDP import surge in Greece or Spain -- would still be associated with less than a 0.9% increase in employment or output due to an inflating distribution sector.
The notion that this can explain the "inevitability" of Spain's 20% unemployment rate is absurd.
SA