In GDP calculation, imports are subtracted, while inventories are included as part of investment. Imports represent goods produced abroad and purchased domestically, so their value is not added to the GDP, which measures domestic production. Inventories, on the other hand, represent domestically produced goods that are not yet sold, and their inclusion in GDP reflects the investment in these goods.
Here's a more detailed breakdown:
Imports:
- Imports are subtracted from GDP because they represent spending on goods and services produced in other countries, not domestically.
- If imports were not subtracted, GDP would be overstating the value of domestic production.
- For example, if a car is assembled in the US but contains imported parts, the value of the imported parts is subtracted from the GDP calculation, and only the value added within the US is included.
Inventories:
- Changes in inventories (i.e., the increase or decrease in the amount of unsold goods held by businesses) are included in the GDP calculation as part of investment.
- If a business produces more goods than it sells in a given period, the increase in inventories is considered investment, and it is added to GDP.
- Similarly, if a business sells more goods than it produces, the decrease in inventories is considered disinvestment, and it is subtracted from GDP.
In summary:
The GDP calculation uses the expenditure approach, which considers spending on domestic goods and services. Imports are subtracted because they represent spending on goods produced abroad, while changes in inventories are included as part of investment, reflecting the value of domestically produced goods that are not yet sold.
