Propensity To Import

Propensity To Import

Propensity to Import, the relationship between national income and expenditure and spending on imports. It is analogous to the Keynesian propensity to consume.

This relationship is important in assessing the total effect of a change in total spending (and thus employment and income). Economic activity is generated by the sum of all domestic expenditures in a country plus spending by other countries on its exports. Domestic spending, however, does not all generate employment and income in the home country: some of it is siphoned off into a demand for imports which generates employment and income in other countries. The extent of this 'leakage' of spending power depends on the propensity to import. An important concept is the marginal Propensity to import, the part of an increase in national income that will be spent on imports.

Anything which causes the level of income to change will also cause imports to change in the same direction. Since an increase in exports increases activity and income in the export trades, this increase in total income will lead in turn to increased imports. The ability of an increase or decrease in exports to generate an increase or decrease in imports in this way is one important element in the attempt to explain how trade between nations tends to be brought into balance. It is also important in helping to explain how booms and slumps in economic activity tend to spread from one country to another.

Whether imports will fluctuate more than or less than proportionately for a given change in income will depend not only on the marginal propensity to import but also on the dependence on external trade. In the U.S.A., although the marginal propensity to import may be small, the average ratio of imports to total income is probably even smaller, so that fluctuations in income may produce more than proportionate fluctuations in imports. In the U.K. the marginal propensity to import is high but the average ratio of imports to income is even higher, so that fluctuations in income tend to produce less than proportionate fluctuations in imports.

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