If a country's ratio of imports to national income rises as the country grows over time, this implies, other things equal, that the country's marginal propensity to import is __________ the country's average propensity to import and, consequently, that the country's income elasticity of demand for imports (YEM) is __________.

Question

Quizplus · Accepted Answer

If the ratio of imports to national income increases as a country grows, it means that imports are growing faster than national income. This implies that the marginal propensity to import (the increase in imports for a given increase in income) is greater than the average propensity to import (the ratio of total imports to total national income). Additionally, if imports grow faster than income, the income elasticity of demand for imports (YEM), which measures the responsiveness of import demand to changes in income, is greater than 1.0, indicating that imports are a luxury good and their demand increases more than proportionally as income increases.

If a Country's Ratio of Imports to National Income Rises