What Is Marginal Propensity To Import?
The marginal propensity to import (MPM) is the amount imports increase or decrease with each unit rise or decline in disposable income. The marginal propensity to import is thus the change in imports induced by a change in income. An economy with a positive marginal propensity to consume is likely to have a positive marginal propensity to import. This is because a portion of goods consumed is likely to be imported.
MPM is calculated as dIm/dY, meaning the derivative of the import function (Im) with respect to the derivative of the income function (Y).
Marginal Propensity To Import Explained
If the marginal propensity to import is 0.3, then an increase in income of $1 will result in an increase in imports of $0.30 ($1 x 0.3).
Countries that consume more imports as their incomes rise have a significant impact on global trade. If a country that imports significant amounts of goods runs into a financial crisis, the extent to which that country’s economic woes will impact exporting countries depends on its marginal propensity to import and the makeup of the goods imported. The level of negative impact on imports from falling income is greater when a country has a marginal propensity to import greater than its average propensity to import. This gap results in a higher income elasticity of demand for imports, leading to a drop in income resulting in a more than proportional drop in imports.
Factors that Determine Marginal Propensity to Import
Countries that have sufficient natural resources within their borders and have developed markets typically have lower marginal propensities to import. Countries that are dependent on imports have a higher marginal propensity to import.
MPM indicates the extent to which imports are subject to changes in income or production. If, for example, the MPM is 0.1, then each dollar of extra income in the economy induces 10 cents of imports. The import function shows the relationship between expenditures on imports and real GDP. An increase in real GDP increases expenditures on imports. In recent years in the United States, the marginal propensity to import is approximately 0.2.
The marginal propensity to import is important to the study of Keynesian economics. First, the MPM reflects induced imports. Second, the MPM is the slope of the imports line, which means it is the negative of the slope of the net exports line and makes it important to the slope of the aggregate expenditures line, as well. The MPM also affects the multiplier process and affects the magnitude of the expenditures and tax multipliers.