Marginal propensity to import

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The marginal propensity to import (MPM) is the fractional change in import expenditure that occurs with a change in disposable income (income after taxes and transfers). For example, if a household earns one extra dollar of disposable income, and the marginal propensity to import is 0.2, then the household will spend 20 cents of that dollar on imported goods and services.

Mathematically, the marginal propensity to import (MPM) function is expressed as the derivative of the import (I) function with respect to disposable income (Y).

Derivative Operation in calculus

The derivative of a function of a real variable measures the sensitivity to change of the function value with respect to a change in its argument. Derivatives are a fundamental tool of calculus. For example, the derivative of the position of a moving object with respect to time is the object's velocity: this measures how quickly the position of the object changes when time advances.

In other words, the marginal propensity to import is measured as the ratio of the change in imports to the change in income, thus giving us a figure between 0 and 1.

Imports are also considered to be automatic stabilisers that work to lessen fluctuations in real GDP.

The UK government assumes that UK citizens have a high marginal propensity to import and thus will use a decrease in disposable income as a tool to control the current account on the balance of payments.

See also

The marginal propensity to save (MPS) is the fraction of an increase in income that is not spent on an increase in consumption. That is, the marginal propensity to save is the proportion of each additional dollar of household income that is used for saving. It is the slope of the line plotting saving against income. For example, if a household earns one extra dollar, and the marginal propensity to save is 0.35, then of that dollar, the household will spend 65 cents and save 35 cents. Likewise, it is the fractional decrease in saving that results from a decrease in income.

In economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income. The proportion of disposable income which individuals spend on consumption is known as propensity to consume. MPC is the proportion of additional income that an individual consumes. For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents. Obviously, the household cannot spend more than the extra dollar.

In macroeconomics, a multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable.


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<i>The General Theory of Employment, Interest and Money</i> book by John Maynard Keynes

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Consumption function

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Autonomous consumption is the consumption expenditure that occurs when income levels are zero. Such consumption is considered autonomous of income only when expenditure on these consumables does not vary with changes in income; generally, it may be required to fund necessities and debt obligations. If income levels are actually zero, this consumption counts as dissaving, because it is financed by borrowing or using up savings. Autonomous consumption contrasts with induced consumption, in that it does not systematically fluctuate with income, whereas induced consumption does. The two are related, for all households, through the consumption function:

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In economics, the absolute income hypothesis concerns how a consumer divides his disposable income between consumption and saving. It is part of the theory of consumption proposed by English economist John Maynard Keynes (1883–1946). The hypothesis was refined extensively during the 1960s and 1970s, notably by American economist James Tobin (1918–2002).