Marginal Propensity to Import (MPM)

Definition

The Marginal Propensity to Import (MPM) is a financial term that denotes the proportion of additional income that an individual, household, or economy is likely to spend on imported goods and services. In other words, it measures the change in import spending resulting from a change in disposable income. A higher MPM value indicates that a greater share of any increase in incomes will be spent on imports.

Phonetic

The phonetics of the keyword “Marginal Propensity to Import (MPM)” are: /ˈmɑrˌdʒɪnəl prəˈpɛnsɪti tu ɪmˈpɔrt/ (M-P-M)

Key Takeaways

1. Definition: Marginal Propensity to Import (MPM) is the proportion of additional income that is spent on imports. It measures how sensitive import spending is to changes in income.
2. Impacts on Economy: MPM plays a significant role in determining the effectiveness of fiscal and monetary policies, as it indicates how changes in income affect import demand. A higher MPM means that a greater proportion of income is spent on imports, reducing the overall impact of government policies designed to stimulate the economy.
3. Calculation: MPM can be calculated by dividing the change in import spending (∆I) by the change in disposable income (∆Yd). So, MPM = ∆I/∆Yd.

Importance

The Marginal Propensity to Import (MPM) is an important concept in business and finance, as it measures the responsiveness of import expenditure to changes in income. It indicates the percentage of additional income that is spent on imported goods and services. MPM plays a crucial role in understanding the open economy multiplier, affecting the overall economic growth and stability of a country. Policymakers and businesses can use MPM to formulate economic policies and strategies to strike a balance between domestic production and foreign imports. By analyzing MPM trends, they can identify the effect of fiscal measures, such as tax changes or government spending, on trade balance and pursue policy measures that support economic growth, job creation, and sustainable development.

Explanation

The Marginal Propensity to Import (MPM) is an important metric in the realm of finance and economics, used to measure the changes in a nation’s import spending habits as a consequence of changes in its income. In essence, it aims to quantify the share of an additional unit of national income that is dedicated toward importing goods and services from foreign countries. Studying the MPM offers valuable insights into how a country’s economy is interacting with international markets and its relative dependence on foreign goods to meet domestic demands. Furthermore, the MPM serves as a crucial factor in the determination of the fiscal multiplier, which helps the government and financial policymakers analyze the impacts of fiscal policies, such as tax adjustments and government spending, on overall economic growth. A higher MPM is indicative of an economy that has a greater inclination to spend its extra income on imports, thereby necessitating the formulation of policies that cater to such preferences. In summary, the MPM is an essential tool in gauging the level of economic interdependence between nations and acts as a critical input for designing effective fiscal policies aimed at nurturing sustainable economic growth.

Examples

1. United States and China Trade Relations: The United States has a high Marginal Propensity to Import (MPM) from China, meaning that for every additional dollar earned or spent in the American economy, a significant portion is spent on importing goods and services from China. This relationship contributed to the widening of the trade deficit in the United States, leading to increased imports from China. The U.S. imports various goods like electronics, clothing, toys, and machinery from China, indicating a high MPM. 2. Impact of Economic Stimulus on Germany’s Imports: In response to the 2008 financial crisis, the German government provided a fiscal stimulus package to boost its economy. As Germany’s economy is heavily reliant on exports, the increase in disposable income from the stimulus package increased the country’s demand for imports. Germany’s Marginal Propensity to Import (MPM) played a significant role in this as every additional euro added to the GDP resulted in higher imports, particularly from other European Union countries and China. 3. Japan’s Import of Energy Resources: Given Japan’s limited energy resources, the country has a high MPM for importing fuel and raw materials such as oil, coal, and natural gas. Japan’s economic growth led to higher consumption and, as a result, higher imports of energy resources. When the Japanese economy expands and GDP grows, a considerable portion of the increased income is allocated to importing these essential resources, resulting in a high MPM for the energy sector.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Import Elasticity
• Aggregate Demand
• Macroeconomic Equilibrium
• Trade Balance
• Foreign Exchange Rate

Sources for More Information

• Investopedia
• WallStreetOasis
• Indeed
• Fincash