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Sem 5 Prep
← Open Economy MacroForeign repercussions

Formulas for this chapter

Foreign trade multiplier with repercussions, export shock

D = MPS1 + MPM1 + MPM2 x MPS1/MPS2 k'' = 1 / D Class case: D = 0.525, k'' = 1.90 (against k' = 2.5)

An autonomous change in this nation's exports, when the partner is large enough for its income to respond. Compute D once and reuse it.

MPS1, MPM1
This nation's marginal propensities to save and import. Class case 0.25 and 0.15
MPS2, MPM2
The partner's marginal propensities. Class case 0.2 and 0.1
D
The common denominator of all three repercussion multipliers

Foreign trade multipliers with repercussions, investment shocks

k* = (1 + MPM2/MPS2) / D shock to Nation 1's investment k** = (MPM2/MPS2) / D shock to Nation 2's investment Check: k* = k'' + k** Class case: k* = 2.86, k** = 0.95

An autonomous change in investment, at home for k* and abroad for k**. Always finish with the k* = k'' + k** check.

k*
Effect on this nation's income per unit of its own autonomous investment
k**
Effect on this nation's income per unit of the partner's autonomous investment, the pure spillover
MPM2/MPS2
The partner's import-to-saving propensity ratio, which sizes the echo. Class case 0.5

Turning a multiplier into a trade balance

dY1 = multiplier x shock dM1 = MPM1 x dY1 dS1 = MPS1 x dY1 dI1 + dX1 = dS1 + dM1 (solve for the missing flow) trade balance change = dX1 - dM1

Every repercussion question that asks for the surplus or deficit rather than just the income. The fourth line recovers whichever of dX1 or dI1 the question did not give you.

dX1
The net change in exports, which for an export shock is smaller than the autonomous change
dM1
Induced imports, always MPM1 times the change in income
Step 3 of 24
The real wordsTheory

The loop, one arrow at a time

Nation 1's exports rise autonomously. Follow it round.

  1. Nation 2's imports rise by the same amount.
  2. Those imports replace Nation 2's domestic production, so Nation 2's income falls.
  3. Nation 2's imports are a function of its income, so they fall back somewhat, neutralising part of the original rise.
  4. Nation 2's imports are Nation 1's exports, so Nation 1's export rise is partly cancelled.

The result: Nation 1's income rises by less than the small-economy formula predicted, and its trade balance improves by less.

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