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 disposable 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 income increases have a significant impact on global trade.
- Developed economies with sufficient natural resources within their borders typically have a lower MPM than developing countries without these resources.
How Marginal Propensity To Import (MPM) Works
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 MPM indicates the extent to which imports are subject to changes in income or production. If, for example, a country’s 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 MPM and the makeup of the goods imported.
An economy with a positive marginal propensity to consume (MPC) is likely to have a positive 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 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
Countries with developed economies and sufficient natural resources within their borders typically have a lower MPM. In contrast, nations that are dependent on purchasing goods from abroad generally have a higher MPM.
Keynesian Economics
The MPM 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 the magnitude of the expenditures and tax multipliers.
Advantages and Disadvantages of Marginal Propensity To Import (MPM)
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 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 MPM.
Related Terms: marginal propensity to consume, exchange rate, multiplier, income elasticity of demand.
