Marginal Propensity to Import (MPI)

Definition

The Marginal Propensity to Import (MPI) is the measure of the change in imports relative to the change in income. It represents the fraction of an additional unit of income that is spent on imported goods and services rather than domestic products. The MPI is a crucial concept in understanding shifts in aggregate demand within an economy.

5 Must Know Facts For Your Next Test

1. The MPI is a measure of how much of an increase in income will be spent on imported goods and services.
2. A higher MPI indicates that a larger portion of additional income will be spent on imports, reducing the impact on domestic demand.
3. The MPI is inversely related to the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS), as the sum of the three must equal 1.
4. Changes in the MPI can lead to shifts in the Aggregate Demand (AD) curve, as a higher MPI reduces the impact of an increase in income on domestic demand.
5. The MPI is an important factor in determining the effectiveness of fiscal and monetary policies in influencing the level of economic activity within a country.

Review Questions

• Explain how the Marginal Propensity to Import (MPI) relates to shifts in Aggregate Demand.
  • The Marginal Propensity to Import (MPI) is directly related to shifts in Aggregate Demand (AD). A higher MPI means that a larger portion of any increase in income will be spent on imported goods and services rather than domestic products. This reduces the impact of the income increase on domestic demand, leading to a smaller shift in the AD curve. Conversely, a lower MPI results in a larger portion of additional income being spent on domestic goods, leading to a more significant shift in the AD curve.
• Describe the relationship between the Marginal Propensity to Import (MPI), Marginal Propensity to Consume (MPC), and Marginal Propensity to Save (MPS).
  • The Marginal Propensity to Import (MPI), Marginal Propensity to Consume (MPC), and Marginal Propensity to Save (MPS) are closely related concepts. The sum of these three propensities must equal 1, as the entire change in income must be accounted for by changes in consumption, savings, and imports. A higher MPI means a smaller fraction of additional income will be spent on domestic consumption, reducing the MPC and leading to a higher MPS or a larger portion of income being saved.
• Analyze how changes in the Marginal Propensity to Import (MPI) can impact the effectiveness of fiscal and monetary policies in influencing the level of economic activity.
  • The Marginal Propensity to Import (MPI) is a crucial factor in determining the effectiveness of fiscal and monetary policies in influencing the level of economic activity within a country. A higher MPI means that a larger portion of any increase in income will be spent on imported goods, reducing the impact on domestic demand and the overall effectiveness of these policies. Conversely, a lower MPI allows for a greater portion of additional income to be spent on domestic products, amplifying the impact of fiscal and monetary policies on the level of economic activity. Understanding the MPI is essential for policymakers in designing and implementing effective economic policies.

Related terms

Aggregate Demand: Aggregate Demand (AD) is the total demand for all goods and services in an economy at a given time and price level.

Marginal Propensity to Consume (MPC): The Marginal Propensity to Consume (MPC) is the change in consumption divided by the change in income, representing the fraction of an additional unit of income that is spent on consumption.

Marginal Propensity to Save (MPS): The Marginal Propensity to Save (MPS) is the change in savings divided by the change in income, representing the fraction of an additional unit of income that is saved.