Foreign trade multiplier

Foreign trade multiplier
See also
Tax principles by Adam Smith Point elasticity Monte carlo method Neoclassical economics Activity measure Arthur Cecil Pigou Austrian theory of money Market dynamics Growth potential

Foreign trade multiplier also known as export multiplier, refers to exports increase. The foreign trade multiplier for income imports through a marginal propensity to import is still widely used and taught. The formulation of a foreign trade input/output multiplier may be more stable with respect to changes in parameter values than the more traditional formula of a foreign trade keynesian input/output multiplier. This is an advantage and that is why the multiplier is used for policy making and economics forecasting .

The value of the foreign trade multiplier is determined by the marginal tendency to save and the marginal tendency to import. Dependence between the marginal tendencies and multiplier value is that the lower marginal tendencies are, the higher the multiplier value will be.

Calculation of foreign trade multiplier

The foreign trade multiplier can be derived algebraically, as it is shown below:

Y= C + I + X - M

Where Y stands for national income, C- national consumption, I- total investment, X- means export and M is for import.

The above reaction can be solved as follow:

Y - C = I + X - M or S = I + X - M

Criticism of foreign trade multiplier

The main reasons in foreign trade multiplier criticism come from static nature and unrealistic assumption, the criticism may be consider problems as following:

1. The foreign trade multiplier depends on the unrealistic assumption that exports and investments are independent of income levels but in reality, it is not.
2. The foreign trade multiplier is assumed to be an immediate process in which it delivers the final results. It is therefore not subject to any delays and is unrealistic.
3. It is based on the unrealistic establishment of full employment, but full employment is not a common thing and rather than the rule.
4. The foreign trade multiplier framework is suitable for the two-country model when more than two countries are considered, the analysis will become more complex and very difficult to interpret the foreign effects of this theory.

References

• Cherunilam F (2008), ‚ International Economics 5E , Tata McGraw-Hill Education, New Delhi
• Currie D, Peters W (2016), Contemporary Economic Analysis (Routledge Revivals): Papers Presented at the Conference of the Association of University Teachers of Economics 1978 , Routledge, New York
• Kumar R (2008), ‚ International Economics , Excel Books India, New Delhi
• Maria M, Kennedy J (2014), ‚ International Economics , PHI Learning, New Delhi
• Polak J.J (2013), An International Economic System , Routledge, Abingdon

Author: Veniamin Terokhin