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Home Theory of International Trade Foreign Trade and National Income


International/Foreign Trade and National Income:


Relation of Foreign Trade to National Income:


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 open economy.


Equation/Formula of National Income:


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.

Relevant Articles:

Home Trade and International Trade
Foreign Trade and National Income
Origin and Purpose of International Trade
Theory of Comparative Cost
Gains From International Trade
Modern Theory of International Trade
Terms of Trade
Advantages and Disadvantages of International Trade

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money

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