Foreign trade plays an important role in the economies of backward as well as
advanced countries of the world. This can be seen from the fact that in some of
the countries like Canada, United Kingdom, Australia, etc., more than 20% of the
national income is derived from international trade. In America the value of
total imports and exports is about 15% of the national income.
The impact of international trade can be judged from the balance of payments
of a country. When the exports of a country exceed its imports, there is a flow
of money income in the country and the level of national income and employment
goes up. On the other hand, when imports exceed exports, there is a withdrawal
of national income. How much the volume and value of exports of a country will
be depends upon the extent of the market for the goods of the country. The
national, income has influence on the export of a country. The imports are
however, affected by the size of national income. The larger the size of
national income, the greater are the imports and vice versa. The marginal
propensity of imports of a nation is small in a closed economy and greater in an
The national income equation thus is:
Y = C + I + G + X - M
Y stands for national income.
C stands for consumption expenditure.
I stands for gross private investment.
G stands for government consumption expenditure.
X stands for volume and value of exports of goods and services.
M stands for volume and value of imports of goods and services.
International Trade Multiplier:
The Keynesian concept of multiplier is
also used for explaining the effect of balance of payments supplies and deficit
on national income and employment of a country.
When the country is having an
export surplus in its balance of payment, the excess money received by the
exporters is spent on consumer goods within the country. The income thus passes
on from exporters to the producers of consumers goods. How much the national
income will rise depends upon the value of the multiplier. If the export surplus
in the balance of payment of a country is $2 crore and the multiplier is 10,
the national income will rise by $20 crore. If the multiplier is 4, the
increase in national income will be $8 crore.