Propensity to Import, Marginal
Propensity to Import, Marginal
The marginal propensity to import is the increase in imports that is caused by a certain increase in income. This concept expresses the idea that as income of economic agents (firms and households) increases, so does their demand for intermediate and consumption goods imported from abroad. Since this relation also holds for the whole economy, at the aggregate level the marginal propensity to import can be calculated as the ratio between the increase in total imports of an economy and the increase in its output. In mathematically formalized economic models, the marginal propensity to import is equal to the partial derivative with respect to output in an import function. If imports are assumed to be a linear function of output, the marginal propensity to import is equal to the slope of the resulting straight line. The concept of the marginal propensity to import is related to the concept of the average propensity to import, which is equal to the ratio of total import to total income.
The marginal propensity to import plays a role in determining the size of the Keynesian multiplier (Blanchard 1997, pp. 232–235). In the Keynesian multiplier model extended to an open economy, some of the increased demand caused by a domestic expansion falls not on domestic goods but on foreign goods. This effect will be bigger, the higher is the marginal propensity to import of the domestic country. In the extreme case in which the additional domestic demand falls completely on imported goods (when the marginal propensity to import is equal to one), the multiplier is equal to one. Empirically, however, the marginal propensity to import is likely to fall between zero and one, which implies a multiplier larger than one even in an open economy. Since imports tend to be equal to a larger share of the economy for smaller countries, the magnitude of the leakage effect of domestic demand expansions into imports is likely to be inversely related to the country size.
An attractive empirical feature of the concept of marginal propensity to import is that it is easily measurable and can be used to forecast the change in imports stemming from a certain expected change in output. For example, if total domestic output in country A increases by 1,000 in a given year, and imports increase by 200 in the same year, the marginal propensity to import is equal to 200/1,000 = 0.2. Assuming that the government expects output to increase by 2,000 in the following year, the projected increase in imports calculated on the basis of the marginal propensity to import is 0.2 × 2,000 = 400. This methodology is obviously based on the assumption that the marginal propensity to import remains constant. This might be a reasonable assumption in the short run. However, the size of the marginal propensity to import is affected by changes in the relative prices of domestic and foreign goods and could therefore change in the long run, or if the economy is hit by a significant exchange rate shock.
SEE ALSO Balance of Trade; Imports; Multiplier, The; Propensity to Consume, Marginal; Propensity to Save, Marginal; Trade
BIBLIOGRAPHY
Blanchard, Olivier. 2005. Macroeconomics, 4th edition. Upper Saddle River, NJ: Prentice Hall.
Giovanni Ganelli
The opinions expressed are personal and should not be interpreted as reflecting any view of the International Monetary Fund.