A Very Simple Simple-Multiplier Question (1 Viewer)

[Sparcod]

I know that a change in aggregate demand component causes a multiplied change in income.

What if its imports?
Lets say MPC= 0.8
then an increase of imports by $10 million should decrease income by $50 million? Im stuck thinking that imports are for the foreigner's benefit and the multiplied income shouldn't be affected by imports. I can suppose take imports as being negative exports.
Can someone justify this?

 

[gnrlies]

I know that a change in aggregate demand component causes a multiplied change in income.

What if its imports?
Lets say MPC= 0.8
then an increase of imports by $10 million should decrease income by $50 million? Im stuck thinking that imports are for the foreigner's benefit and the multiplied income shouldn't be affected by imports. I can suppose take imports as being negative exports.
Can someone justify this?

this is true.

shifts occur upwards and downwards...

 

[*Ninny-mole*]

Yeah that's right. Isn't the multiplier 1 / MPS? If it is, and I'm pretty sure it is, then 1/0.2=5. Then 5 x $10m=$50m, but you probably knew that anyway. But yes, it's correct.

 

[gnrlies]

Just to provide a little bit of extra information to this answer.......

Keynesian models are extremely presumptuous (that is they rely on assumptions which do not hold true in the real world) and are therefore often incorrect.

The reason why an increase in imports would result in a multiplied reduction in equilibrium income (as per a keynesian model of income) is as follows:

As imports rise, local producers are made worse off as consumers no longer need domestic production (as they are purchasing their goods from overseas). Because this money can no longer be spent and respent by the domestic producer, equilibrium income falls by an amount greater than the increase in exports.

(hence all those today tonight esque stories on how evil it is to import goods from another country).

But the truth is this:

When imports rise, it will usually be for imports where we have no domestic production. rises in imports usually reflect rising prosperity and does not have the impact as just described. Certainly where we can re-allocate production to more efficient industries this will in fact be beneficial

In other words, the keynesian model of income is too simple and is therefore incorrect

Howevor from a mathematical perspective, your initial analysis is correct