Marginal Propensity to Import (MPM)

The marginal propensity to import (MPM) measures how much imports change in response to a change in disposable income. It captures the portion of each additional dollar of income that is spent on foreign-produced goods and services.

Key points

• Definition: MPM = ΔImports / ΔDisposable Income (often written as dIm/dY).
• Interpretation: If MPM = 0.3, an additional $1 of income raises imports by $0.30.
• Policy relevance: MPM influences how domestic income changes affect global trade and the effectiveness of fiscal policy.
• Typical pattern: Economies with abundant domestic production and natural resources tend to have lower MPMs; economies that rely on foreign goods tend to have higher MPMs.

How MPM is calculated and interpreted

MPM is the slope of the imports function with respect to income:
* Discrete form: MPM = ΔIm / ΔY
* Continuous form: MPM = dIm / dY

A higher MPM means a larger share of income gains leak abroad through imports, reducing the portion of demand that circulates domestically.

Example: If national income rises by $100 million and imports increase by $30 million, MPM = 30/100 = 0.3.

Role in Keynesian analysis and the multiplier

MPM is central in open-economy Keynesian models because imports are an induced component of demand. Imports typically rise with income, so they act as a leakage from the domestic expenditure stream.

In a simple model where consumption depends on MPC (marginal propensity to consume) and imports depend on MPM, the fiscal multiplier for autonomous spending is:

multiplier = 1 / (1 – MPC + MPM)

A larger MPM increases the denominator and therefore reduces the size of the multiplier—fiscal stimulus translates into less domestic output when more of each dollar is spent on imports.

MPM is also the (positive) slope of the imports line and therefore the negative of the slope of the net exports line. That relationship affects aggregate expenditure schedules and equilibrium output.

Relationship with other measures

• Marginal Propensity to Consume (MPC): Economies with higher MPCs often have positive MPMs because part of additional consumption is spent on imported goods.
• Income elasticity of imports: When MPM exceeds a country’s average propensity to import, imports are highly income-elastic—income falls can produce a more than proportional drop in imports.

Practical considerations and limitations

Advantages:
* Straightforward to estimate from data on imports and income.
* Useful for forecasting trade flows and evaluating policy spillovers.

Limitations:
* MPM is not stable over time. It varies with:
– Relative prices of domestic vs. foreign goods
– Exchange rate movements
– Changes in trade patterns and supply chains
* Structural shifts (trade liberalization, new suppliers, domestic production changes) can alter MPM substantially.

Implications

• For policymakers: High MPM implies that domestic stimulus will leak more to trading partners, reducing domestic multiplier effects and altering trade balances.
• For trading partners: Countries exporting to high-MPM economies may be more vulnerable to downturns in those economies.
• For forecasting: MPM should be estimated frequently and treated as conditional on current prices, exchange rates, and trade structure.