Unformatted text preview: Marginal Propensity to Import
Following the derivation of the multiplier we did in discussion class, lets think about the Spending Balance model with the following change: imports increasing as Y increases. Lets say that the change in Net Exports follows this relationship: X = -M P I Y where MPI is the Marginal Propensity to Import, 0<MPI<1. MPI gives you how much Imports changes as Y increases by $1. Because MPI is positive, MPI is the amount imports go up as Y goes up by $1. Recall the equilibrium in the spending balance model, where we replace each variable with its version. Y =C +I +G+X
becomes... Y =
Replace C - MPC Y + I+ G+ X X with -M P I Y = Y to get: Y + I+ G + -M P I Y C - MPC putting all the we get: Y terms on the LHS and simplifying like in discussion class,
1 Y = ( 1-M P C+M P I )( C + I+ G) 10 3 1 the multiplier in this situation is 1-M P C+M P I > 1 1 1 An example: if MPC=.8 and MPI=.1, then the multiplier is 1-.8+.1 = .3 = >1 If G = 300, then by the formula we have Y = (10/3) (300) = 1000. 1 ...
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