What Is Marginal Propensity To Import (MPM)?

The marginal propensity to import (MPM) is the amount imports increase or decrease with each unit rise or decline in disposable income. The idea is that rising income for businesses and households spurs greater demand for goods from abroad and vice versa.

Key Takeaways

  • The marginal propensity to import (MPM) is the change in imports induced by a change in income.
  • The idea is that rising income for businesses and households spurs greater demand for goods from abroad and vice versa.
  • Nations that consume more imports as their population's incomes increases have a significant impact on global trade.

How Marginal Propensity To Import (MPM) Works

Marginal propensity to import (MPM) is a component of Keynesian macroeconomic theory. It is calculated as dIm/dY, meaning the derivative of the import function (Im) with respect to the derivative of the income function (Y).

The marginal propensity to import (MPM) indicates the extent to which imports are subject to changes in income or production. If, for example, a country's marginal propensity to import (MPM) is 0.3, then each dollar of extra income in that economy induces 30 cents of imports ($1 x 0.3). 

Countries that consume more imports as the income of their population rises have a significant impact on global trade. If a country that purchases a substantial amount of goods from overseas runs into a financial crisis, the extent to which that nation’s economic woes will impact exporting countries depends on its marginal propensity to import (MPM) and the makeup of the goods imported. 

Important

An economy with a positive marginal propensity to consume (MPC) is likely to have a positive marginal propensity to import (MPM) because a portion of goods consumed is likely to come from abroad.

The level of negative impact on imports from falling income is greater when a country has a marginal propensity to import (MPM) 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. 

Special Considerations

Factors that Determine Marginal Propensity To Import (MPM)

Countries with developed economies and sufficient natural resources within their borders typically have lower marginal propensities to import (MPM). In contrast, nations that are dependent on purchasing goods from abroad generally have a higher marginal propensity to import (MPM).

Keynesian Economics

The marginal propensity to import (MPM) is important to the study of Keynesian economics. First, the marginal propensity to import (MPM) reflects induced imports. Second, the marginal propensity to import (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 marginal propensity to import (MPM) also affects the multiplier process and the magnitude of the expenditures and tax multipliers.

Advantages and Disadvantages of Marginal Propensity To Import (MPM)

Marginal propensity to import (MPM) is easy to measure and functions as a useful tool to predict changes in imports based on expected changes in output.

The problem is that a country’s marginal propensity to import (MPM) will unlikely remain consistently stable. The relative prices of domestic and foreign goods change and exchange rates fluctuate. These factors impact purchasing power for goods shipped in from overseas and, as a consequence, the size of a country’s marginal propensity to import (MPM).