Question

The table below shows national income and imports in billions of dollars. Assume that the level of export is $300 billion.

National Income (Y)	Imports (IM)	Net Exports (X – IM)
100	85
200	120
300	155
400	190
500	225
600	260
700	295
800	330

1. Compare the level of net export for each level of national income and fill in the table.
2. Plot the net export function on a scale diagram and explain why is it downward sloping.
3. What is the marginal propensity to import? Explain
4. Suppose one  of the Canadian major partners experiences a significant recession explain how this affects the net export function in your diagram?

Answer 1

National Income (Y)	Imports (IM)	Net Exports (X – IM)
100	85	215
200	120	180
300	155	145
400	190	110
500	225	75
600	260	40
700	295	5
800	330	-30

the net export function is negatively related to the domestic income because as income increases the import of the nation also increases and thus net export ( export-import) decreases.

b. marginal propensity to import = change in import/change in income

= 35/100 = 0.35
MPI is 0.35 at all levels of income. which means that 35% of additional income is spent on imports.

c. recession in the major partner country would result in a decrease in the export of the home country and thus we have less value of export for each level of income as a result the net export curve will shift backward.