foreign trade an income determination

• Introducing exports (x) and imports (m), assume exports are exogenous (independent of level of income). We assume imports are a function of income.
• Current account balance- assumed exports are independent of level of income but imports are increased with income. This means at low income level exports will exceed imports and there will be a current account surplus
• The effect of foreign trade is to reduce the size of the multiplier the higher the value of marginal propensity to import the lower the value of the multiplier
•  m must be smaller than closed economy multiplier as is positive, multiplier will be higher the greater the marginal propensity to consume, will be lower the greater the tax rate, will be lower greater the marginal propensity to import