Question

Explain the following in brief:

Foreign trade multiplier

Answer 1

The foreign trade multiplier is an economic concept that shows how income from foreign trade (exports) can have a multiplied effect on a country’s total income and employment. When foreign buyers purchase a country’s goods, the income of those engaged in export industries increases. These individuals then spend their new income on consumer goods, leading to a further increase in overall income in the economy.

The value of the foreign trade multiplier depends on the marginal propensity to save (S) and the marginal propensity to import (I), both of which are leakages from the domestic income stream. The formula for the foreign trade multiplier is:

K = `1/(I xx S)`

Where:

K = Foreign trade multiplier

I = Marginal propensity to import

S = Marginal propensity to save