EXPORT MULTIPLIER: EFFECTS OF CHANGE

IN EXPORT ON INCOME:

We start with all the assumptions applicable in income

determination model in open economy.
1. The economy is an advanced capitalistic economy
facing depression.
2. The Price level, wage rate, interest rate and
exchange rate are given and constant.
3. No government activities.
4. its an open economy having foreign
transactions
5. Investment expenditure is autonomously given.
I=I0
6. Aggregate consumption expenditure is a stable
function of aggregate national income C=f(Y).
 assume linear consumption function C = a +bY ,
0<b<1
7. Exports are autonomously given and imports
depend on the level of income
X=X0 and M=M(Y). Assume linear import
function M= α+qY, q>0

The aggregate demand of the economy is given by

the sum of three components – aggregate
consumption expenditure (C), investment
expenditure (I) and total exports (X). Total
aggregate demand = C+I+X.
The aggregate supply in an open economy is the
sum of net national output (Y) and total import (M).
Total aggregate supply = Y+M.
The equilibrium level of income in an open economy system
is given by
a + I0 + X 0 −α
Y0 =
1− b + q
The equilibrium condition can also be written as
Y=C+I+X-M
Y-C=I+X-M
S=I+X-M
S-I=X-M
That is, excess of saving over investment is equal to excess of
export over import.
Further, we can write
S+M=X+I
That is, total saving plus total import is equal to total export
plus total investment.
The Export Multiplier. Consider the effect of change in
exports on the equilibrium level of income. The equilibrium
level of income in an open economy system is given by
a + I0 + X 0 −α
Y0 =
1−b + q
Suppose that autonomous export X0 increases to X0+∆X0,
other things remaining the same. The new equilibrium level
of income Y1 is obtained by putting X0+∆X0 in place of X0 in
the above equation.
a + I 0 + X 0 + ∆X 0 − α
Y1 =
1−b + q
The change in income level is given by
∆Y = Y1 − Y0
 a + I 0 + X 0 + ∆X − α a + I 0 + X 0 − α
= −
1−b + q 1−b + q
∆X
∆Y =
1−b + q

Diagrammatic representation:

Change in exports (∆X) =QR

Change in income (∆Y) = PR
QR ∆X
= = Slope of the S + M curve
PR ∆Y

But the slope of the S+M curve is equal to the sum of the
MPS and the MPM
∆X
= s +q
∆Y
1
∆Y = ∆X
s +q