Published Oct 25, 2023 The Marginal Propensity to Import (MPM) refers to the proportion of each additional unit of income that is used to import goods and services from foreign countries. It represents the responsiveness of imports to an increase in income. To understand the concept of MPM, consider a country that imports a significant portion of its consumer goods. When the country experiences an increase in income, individuals and businesses have the capacity to purchase more goods and services. Some of these additional purchases may come from domestic production, while others may be imported goods. The MPM reflects the ratio of imported goods and services to the increase in income. For example, if the MPM is 0.3, it means that for every additional unit of income, 30% of it is spent on imported goods and services. Let’s assume the economy of this country is booming, and individuals’ incomes are rising. As a result, their purchasing power increases, and they decide to spend a portion of the additional income on imported luxury goods and foreign vacations. This leads to an increase in imports and a corresponding increase in the MPM. Conversely, if there is a decrease in income, individuals may choose to spend less on imported goods and services. This would result in a decrease in imports and a decrease in the MPM. The Marginal Propensity to Import plays a significant role in determining a country’s trade balance. Understanding this concept helps policymakers and economists analyze the impact of changes in income on imports and, consequently, on the overall economy. It provides insights into the potential effects of income fluctuations on the domestic economy and the international trade relationships of a country. Additionally, analyzing the MPM helps inform decisions related to trade policies, exchange rates, and economic stability.Definition of Marginal Propensity to Import (MPM)
Example
Why Marginal Propensity to Import Matters
Economics