Marginal Propensity to Import (MPM) Calculator
This tool calculates the Marginal Propensity to Import (MPM), which measures the change in import spending caused by a change in a country's disposable income.
Enter the change in disposable income and the resulting change in imports.
Enter Changes
Understanding the Marginal Propensity to Import (MPM)
What is MPM?
The Marginal Propensity to Import (MPM) is an economic concept that quantifies the proportion of an increase in disposable income that is spent on imported goods and services. It's a key component in macroeconomic models, influencing the size of the expenditure multiplier.
MPM Formula
The formula for MPM is:
MPM = ΔM / ΔYd
Where:
ΔM= Change in ImportsΔYd= Change in Disposable Income
The value of MPM typically lies between 0 and 1.
What the MPM Value Means
- An MPM close to 0 means that most additional income is spent on domestically produced goods/services or saved, with very little going to imports.
- An MPM close to 1 means that almost all additional income is spent on imports.
- A higher MPM reduces the size of the expenditure multiplier, meaning that changes in autonomous spending (like government spending or investment) have a smaller overall impact on the economy's total output.
MPM Examples
See how MPM is calculated in different scenarios:
Example 1: Income Increases, Imports Increase
Scenario: A country's disposable income increases by $100 billion, and imports increase by $15 billion.
1. Known Values: ΔYd = $100 billion, ΔM = $15 billion.
2. Formula: MPM = ΔM / ΔYd
3. Calculation: MPM = 15 / 100
4. Result: MPM = 0.15
Conclusion: For every extra dollar of disposable income, 15 cents is spent on imports.
Example 2: Income Increases, Imports Increase More
Scenario: Disposable income rises by £50 billion, leading to a £20 billion increase in imports.
1. Known Values: ΔYd = £50 billion, ΔM = £20 billion.
2. Formula: MPM = ΔM / ΔYd
3. Calculation: MPM = 20 / 50
4. Result: MPM = 0.40
Conclusion: A higher MPM (0.40) suggests a larger portion of additional income goes towards foreign goods.
Example 3: Income Decreases, Imports Decrease
Scenario: Due to a recession, disposable income falls by €200 billion, causing imports to decrease by €30 billion.
1. Known Values: ΔYd = -€200 billion, ΔM = -€30 billion.
2. Formula: MPM = ΔM / ΔYd
3. Calculation: MPM = -30 / -200
4. Result: MPM = 0.15
Conclusion: MPM remains positive (0.15), indicating that for every euro of income *lost*, imports *decrease* by 15 cents.
Example 4: Income Increases, Imports Unchanged
Scenario: A policy increases disposable income by $500 million, but imports remain unchanged (ΔM = 0).
1. Known Values: ΔYd = $500 million, ΔM = $0 million.
2. Formula: MPM = ΔM / ΔYd
3. Calculation: MPM = 0 / 500
4. Result: MPM = 0
Conclusion: An MPM of 0 means none of the additional income is spent on imports in this specific instance.
Example 5: Income Increase, Significant Import Increase
Scenario: Disposable income increases by ¥1,000 billion, leading to a ¥600 billion increase in imports.
1. Known Values: ΔYd = ¥1,000 billion, ΔM = ¥600 billion.
2. Formula: MPM = ΔM / ΔYd
3. Calculation: MPM = 600 / 1000
4. Result: MPM = 0.60
Conclusion: A high MPM (0.60) suggests a strong tendency to import with rising income.
Example 6: Income Decrease, Imports Decrease Significantly
Scenario: Disposable income decreases by A$50 billion, and imports decrease by A$25 billion.
1. Known Values: ΔYd = -A$50 billion, ΔM = -A$25 billion.
2. Formula: MPM = ΔM / ΔYd
3. Calculation: MPM = -25 / -50
4. Result: MPM = 0.50
Conclusion: An MPM of 0.50 means half of any change in disposable income affects import spending.
Example 7: Calculating from Specific Periods
Scenario: Period 1: Yd = $5000, M = $500. Period 2: Yd = $6000, M = $650.
1. Calculate Changes: ΔYd = $6000 - $5000 = $1000, ΔM = $650 - $500 = $150.
2. Formula: MPM = ΔM / ΔYd
3. Calculation: MPM = 150 / 1000
4. Result: MPM = 0.15
Conclusion: The MPM between these two periods is 0.15.
Example 8: Large Change in Income
Scenario: Following a tax cut, national disposable income increases by $500 billion, leading to a $75 billion rise in imports.
1. Known Values: ΔYd = $500 billion, ΔM = $75 billion.
2. Formula: MPM = ΔM / ΔYd
3. Calculation: MPM = 75 / 500
4. Result: MPM = 0.15
Conclusion: Despite the large scale, the proportion spent on imports is 0.15.
Example 9: Small Change in Income
Scenario: A small town experiences an increase in local disposable income by $1 million, and imports rise by $400,000.
1. Known Values: ΔYd = $1,000,000, ΔM = $400,000.
2. Formula: MPM = ΔM / ΔYd
3. Calculation: MPM = 400,000 / 1,000,000
4. Result: MPM = 0.40
Conclusion: The MPM is 0.40 for this local economy example.
Example 10: Imports Fall More Than Income
Scenario: Due to a shock, disposable income drops by $100 billion, and imports drop by $80 billion.
1. Known Values: ΔYd = -$100 billion, ΔM = -$80 billion.
2. Formula: MPM = ΔM / ΔYd
3. Calculation: MPM = -80 / -100
4. Result: MPM = 0.80
Conclusion: A high MPM (0.80) in this contractionary phase means imports are highly sensitive to falling income.
Frequently Asked Questions about MPM
1. What does MPM stand for?
MPM stands for Marginal Propensity to Import.
2. What does the MPM measure?
It measures how much a country's import spending changes in response to a change in its disposable income.
3. What is the formula for MPM?
MPM = (Change in Imports) / (Change in Disposable Income), or ΔM / ΔYd.
4. What is a typical range for the MPM value?
The MPM is usually between 0 and 1 (or 0% and 100%). A value outside this range would indicate unusual economic behavior or data errors.
5. Can MPM be negative?
The calculated value can be negative if imports and disposable income move in opposite directions (e.g., income goes up, imports go down, or vice versa). While mathematically possible based on specific data points, a persistently negative MPM is highly unusual in stable economic models as it implies imports fall when people have more money or rise when they have less.
6. What happens if the change in disposable income is zero?
If the change in disposable income (ΔYd) is zero, the MPM is undefined (division by zero). The calculator will show an error in this case, as the formula requires a non-zero change in income to determine the *marginal* propensity.
7. How does MPM affect the economic multiplier?
A higher MPM reduces the size of the expenditure multiplier. This is because a larger portion of any initial spending injection 'leaks out' of the domestic economy through imports.
8. Is MPM the same as the Average Propensity to Import (APM)?
No. APM is the *total* imports divided by the *total* disposable income (M/Yd). MPM is about the *change* in imports relative to the *change* in income (ΔM/ΔYd).
9. Why is MPM important for policy makers?
Knowing the MPM helps policy makers estimate the impact of changes in income (e.g., from tax cuts or government spending) on the trade balance and overall economic activity.
10. What factors influence a country's MPM?
Factors include the availability and variety of domestic goods, the openness of the economy to trade, exchange rates, consumer preferences for foreign goods, and trade policies.
