foreign trade multiplier

foreign trade multiplier

the increase in a country's foreign trade resulting from an expansion of domestic demand. The increase in domestic demand has a twofold effect. As well as directly increasing the demand for domestic products, it will also:
  1. directly increase the demand for IMPORTS by an amount determined by the country's MARGINAL PROPENSITY TO IMPORT;
  2. indirectly it may also increase overseas demand for the country's EXPORTS by those countries the incomes of which have now been increased by being able to export more to the country concerned.

The latter effect, however, is usually much less than the former so that the overall effect is to ‘dampen down’ the value of the domestic MULTIPLIER; i.e. the increase in net imports serves to partially offset the extra income created by increased spending on domestic products. See CIRCULAR FLOW OF NATIONAL INCOME MODEL, LOCOMOTIVE PRINCIPLE.

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