MARGINAL FACTOR COST, MONOPSONY: The change in total factor cost resulting from a change in the quantity of factor input employed by a monopsony. Marginal factor cost, abbreviated MFC, indicates how total factor cost changes with the employment of one more input. It is found by dividing the change in total factor cost by the change in the quantity of input used. Marginal factor cost is compared with marginal revenue product to identify the profit-maximizing quantity of input to hire.
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Imports from the foreign sector that depend on domestic income or production (especially national income and gross domestic product). That is, changes in income induce changes in imports. Induced imports are measured by the marginal propensity to import (MPM) and are reflected by a positive slope of imports line. Induced imports are the reason for induced net exports, generating a negatively sloped net exports line. Autonomous net exports are due to a combination of autonomous exports and autonomous imports. Induced imports are imports from the foreign sector that are based on the level of domestic income or production. This is one of two basic classifications of imports. The other is autonomous imports, imports that are NOT based on the level income or production. In other words, imports can be divided into: (1) imports which are obtained from the foreign sector regardless of the level of aggregate production and (2) an adjustment of imports (more or less) that results because aggregate production and income changes.
Imports, and thus net exports, are commonly assumed to be totally autonomous in the introductory analysis of Keynesian economics. That is, any induced imports that might realistically exist are ignored. Doing so not only simplifies the analysis, but also places the focus on how and why autonomous imports change, and how such changes affect the macroeconomy. More sophisticated, and realistic, analysis then includes induced imports.
Induced imports are reflected by the slope of the imports line, which is the marginal propensity to import (MPM). This negative value of the MPM thus enters into the slope of the net exports line and the aggregate expenditures line',500,400)">aggregate expenditures line, which then affects the value of the expenditures multiplier, as well.
Exports Minus ImportsNet exports are the difference between exports and imports, or exports minus imports. Exports are goods produced by the domestic economy and purchased by the foreign sector. Imports are goods produced by the foreign sector and purchased by the domestic economy (that is, the domestic household, business, and government sectors).
The amount of exports sold to the foreign sector is theoretically and realistically unaffected by the level of domestic income or production. That is, exports are totally autonomous. They are affected by what transpires in the foreign sector not in the domestic economy. For example, an increase in U.S. national income is NOT going to induce a change in exports.
In contrast the amount of imports purchased from the foreign sector is induced by the level of domestic income and production. A major component of induced imports is induced consumption. That is, imports are actually part of the consumption expenditures undertaken by the household sector. When the household sector receives more income, then (based on the fundamental psychological law) it increases consumption expenditures. Some of these expenditures are for domestic production and some for imports. More income, means more of both types.
Of course, imports also consist of investment expenditures by the business sector and government purchases by the government sector. Both of these are induced by income and production, as well. And both of these are used to purchase both domestic production and imports.
Hence, imports are induced by income and production. However, because imports are subtracted from exports to derive imports, an income induced increase in imports means a decrease in net exports.
Induced: A Line
The best way to illustrate induced imports is with a imports line, such as the one presented in the exhibit to the right. The red line, labeled M in the exhibit, indicates imports at different levels of domestic income or production. The positive slope of this line indicates induced imports and the vertical intercept indicates autonomous imports.
The red line, labeled M in the exhibit, is the positively-sloped imports line for the equation: M = 0 + 0.075Y. This line indicates that greater levels of income induce more imports.
In this case, autonomous imports happen to be zero as the imports line emerges from the origin. But autonomous imports could just as easily be a positive amount.
Other Induced ExpendituresImports are part of net exports, one of several induced expenditures. The other three aggregate expenditures--consumption expenditures, government purchases, and imports--are also induced by income and production.
Other components of the macroeconomy are also related to, or induced by, income and production. An important one is saving, which is the other side of consumer behavior. Consumption and saving are both induced by income. The psychological law states that an increase in income is used both for extra consumption and extra saving. A second induced part of the macroeconomy is taxes. In particular, sales and income taxes are directly related to income. More income invariably means more taxes. Another is the demand for money',500,400)">money. Because expenditures use money, an increase in income not only induces expenditures, it also induces the demand for money.
- Consumption is unquestionably the most important induced expenditure. It is not only the largest of the four aggregate expenditures, but it is also the most induced of the four. It captures the fundamental psychological law and triggers the largest change in expenditures resulting from a change in income or production.
- Investment is induced by income because an expanding economy generally boosts business profit, which is then used for investment expenditures on capital goods.
- Government purchases are induced by income and production because extra income generates more tax revenue (especially state and local tax revenue), which is then used by government to finance expenditures.
INDUCED IMPORTS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 28, 2024].
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