Net exports are commonly assumed to be totally autonomous in the introductory analysis of Keynesian economics. That is, any induced net exports that might realistically exist are ignored. Doing so not only simplifies the analysis, but also places the focus on how and why autonomous net exports change, and how such changes affect the macroeconomy. More sophisticated, and realistic, analysis then includes induced net exports.

Induced net exports are reflected by the slope of the net exports line, which is the negative of the marginal propensity to import (MPM). This negative value of the MPM thus enters into the slope of the aggregate expenditures line',500,400)">aggregate expenditures line which then affects the value of the expenditures multiplier, as well.

Exports Minus Imports

The amount of exports sold to the foreign sector is theoretically and realistically unaffected by the level of domestic income or production. That is, exports are totally autonomous. They are affected by what transpires in the foreign sector not in the domestic economy. For example, an increase in U.S. national income is NOT going to induce a change in exports.

In contrast the amount of imports purchased from the foreign sector is induced by the level of domestic income and production. A major component of induced imports is induced consumption. That is, imports are actually part of the consumption expenditures undertaken by the household sector. When the household sector receives more income, then (based on the fundamental psychological law), it increases consumption expenditures. Some of these expenditures are for domestic production and some for imports. More income, means more of both types.

Of course, imports also consist of investment expenditures by the business sector and government purchases by the government sector. Both of these are induced by income and production, as well. And both of these are used to purchase both domestic production and imports.

Hence, imports are induced by income and production. However, because imports are subtracted from exports to derive net exports, an income induced increase in imports means a decrease in net exports.

Induced: An Equation

NX

=

m

+

nY

As with any linear equation, the two key parameters that characterize this net exports equation are slope and intercept. Induced net exports are indicated by the slope of the net exports equation. Autonomous net exports are then indicated by the intercept.

• An Induced Slope: The slope of the net exports equation (n) measures the change in net exports resulting from a change in income. If income changes by $1, then net exports change by $n. This slope is generally assumed and empirically documented to be less than zero, but greater than negative one (-1 < n < 0). Because imports are induced and exports are not, this slope is actually the negative of the value of the marginal propensity to import (MPM), or negative induced imports.


• An Autonomous Intercept: The intercept of the net exports equation (m) measures the amount of net exports undertaken if income is zero. If income is zero, then net exports is $m. The intercept is generally assumed and empirically documented to be positive (0 < m). It is conceptually identified as autonomous net exports. This is the difference between autonomous exports and autonomous imports.

Induced: A Line

Net Exports Line

The red line, labeled X-M in the exhibit, is the negatively-sloped net exports line for the equation: NX = 1 - 0.075Y. This line indicates that greater levels of income induce fewer net exports.

Because net exports are the difference between exports and imports, this line can be divided into its two component parts--exports and imports.

• Autonomous Exports: A click of the [Autonomous Exports] button demonstrates the first component. Because exports depend on activity in the foreign sector and not the domestic economy, exports are autonomous--completely and totally. Hence the exports line is horizontal, with a zero slope. Autonomous exports are equal to $1 trillion at every level of domestic income and production.


• Induced Imports: A click of the [Induced Imports] button demonstrates the second component. The resulting red imports line is positively sloped, with the slope being induced imports. In this case, autonomous imports happen to be zero as the imports line emerges from the origin. But autonomous imports could just as easily be a positive amount.

Other Induced Expenditures

• Consumption is unquestionably the most important induced expenditure. It is not only the largest of the four aggregate expenditures, but it is also the most induced of the four. It captures the fundamental psychological law and triggers the largest change in expenditures resulting from a change in income or production.


• Investment is induced by income because an expanding economy generally boosts business profit, which is then used for investment expenditures on capital goods.


• Government purchases are induced by income and production because extra income generates more tax revenue (especially state and local tax revenue), which is then used by government to finance expenditures.