International (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 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.