Question

"Imports act as an automatic stabilizer in an open economy."

Is this statement correct? Explain your answer.

Answer 1

Automatic stabilizers are the tools or variable that help in mitigating the impact of recession or expansion. Imports can be considered as automatic stabilizer because when the economy is expanding, consumers have more income and if they spend it on imports, this will decrease aggregate demand because net exports will decline. In that manner, excessive expanding is reduced.

Similarly if the economy is suffering from recession, income levels are reduced and therefore spending on imports is decreased. This increases net exports and helps in increasing aggregate demand so that the effect of recession is somewhat mitigated.