Import

Topic: Balance of Payments and Exchange Rates · NCERT: Class 7, Ch 12 "Understanding Markets"; Class 12, Ch 1 "Introduction (Macroeconomics)"; Class 12, Ch 2 "National Income Accounting"; Class 12, Ch 6 "Open Economy Macroeconomics"

Meaning

An import is a good or service that residents of a country buy from the rest of the world. Examples are crude oil, a Korean phone, or a foreign consulting service bought by an Indian firm.

Imports matter because the money spent on them becomes another country's income, not Indian income. That makes imports a leakage from the domestic circular flow of income. They also enter the national income identity and the Balance of Payments.

• Import function: M = M̄ + mY
• Income identity: Y = C + I + G + X − M

Explanation

1. Why an import is a leakage

• Circular flow of income: firms pay wages and profits to households. The money comes back to firms when households spend it.
• An injection adds spending to this loop from outside.

• A leakage takes spending out of the loop.

• How an import leaks spending out:

• An Indian household buys an imported laptop.
• The rupees paid do not become income for any Indian producer.

• They become income for a foreign producer.

• The full list of leakages and injections:

• Leakages: savings (S), taxes (T) and imports (M).
• Injections: investment (I), government spending (G) and exports (X).

• Equilibrium needs S + T + M = I + G + X.

• Imports in the income identity:

• Start with Y + M = C + I + G + X. Imports add to supply in domestic markets. Exports add to demand.
• Rearranged: Y = C + I + G + (X − M) = C + I + G + NX.
• Net exports (NX) = X − M. If NX < 0, the country has a trade deficit, which means it buys more from abroad than it sells.

2. The import function: autonomous and induced imports

• M = M̄ + mY
• Autonomous imports (M̄ > 0): imports that happen whatever the national income is. Examples are essential crude oil and defence equipment.
• Induced imports (mY): imports that rise as income rises.

• Marginal propensity to import (m, where 0 < m < 1): the share of each extra rupee of income that is spent on imports. In symbols, m = ΔM/ΔY.

• Worked example (NCERT Q10): M = 60 + 0.06Y.

• m = 0.06.
• Out of every extra ₹100 of income, ₹6 goes on imports.

3. What makes imports rise or fall

• Domestic income (Y) up → imports up
• People with more income buy more of everything.

• That includes foreign goods.

• Real exchange rate (R) up → imports down

• R is the price of foreign goods measured in domestic goods.
• When R rises, foreign goods become relatively costlier.

• So people switch to domestic goods and import less.

• Exports behave differently:

• Exports depend on foreign income and on R, not on Indian income.
• The model treats them as fixed from outside (X = X̄).

4. Imports shrink the multiplier

• Higher m → flatter aggregate demand (AD) curve
• AD is the total planned spending on domestic output.
• When income rises, a bigger share of the extra income leaks into foreign goods.

• So demand for domestic output rises by less.

• Open-economy multiplier = 1/(1 − c + m), where c is the marginal propensity to consume (MPC), the share of extra income that people spend.

• It is smaller than the closed-economy multiplier 1/(1 − c).

c = 0.8, m = 0.3	Formula	Multiplier	Effect of ₹100 more autonomous spending
Closed economy	1/(1 − 0.8)	5	Output rises by ₹500
Open economy	1/(1 − 0.8 + 0.3)	2	Output rises by ₹200

• Why the open-economy multiplier is smaller: in every round of spending, part of the new income goes to foreign goods. The chain of spending therefore dies out faster.
• A rise in autonomous imports lowers output: ΔY/ΔM̄ = −1/(1 − c + m).

• With the same numbers, a ₹50 rise in M̄ lowers Y by ₹100.

• With proportional taxes (T = tY): the multiplier is 1/[1 − c(1 − t) + m].

• With c = 0.8, t = 0.25 and m = 0.3, it is 1/0.7 ≈ 1.43.

• Taxes and imports are both leakages, so together they shrink the multiplier further.

• Worked example (NCERT Q13): M = 50 + 0.05Y, X = 90, and the multiplier is 1/0.25 = 4. This gives Y = 560.

• M = 50 + 0.05 × 560 = 78, so NX = 90 − 78 = 12.
• If G rises to 50, then Y = 600 and M = 80, so NX falls to 10.
• Higher output pulls in more imports, so the trade balance worsens.

In India

• Where imports are recorded: imports are part of the external sector. This is the fourth sector of the macroeconomy, after households, firms and government.
• All dealings with the rest of the world are recorded in the Balance of Payments (BoP).

• Trade in goods and services, including imports, falls in the current account. The current account also records income and transfers.

• Current account deficit (CAD): this is when a country pays more to the world on the current account than it receives.

• India's CAD was about 0.6% of GDP in 2024-25, against 0.7% in 2023-24 [2][3].
• The CAD stayed small because strong services exports and steady remittances (money sent home by Indians working abroad) paid for a large part of India's imports [2].

• In Q4 (Jan–Mar) 2024-25, India had a current account surplus of US$ 13.7 billion (1.4% of GDP) [3].

• The 1991 lesson:

• By 1991, India's foreign exchange reserves (the stock of foreign currency held by the RBI) could not pay for even two weeks of imports.
• Leakages through imports and debt payments had grown bigger than injections through exports, and the gap could no longer be financed.
• The response was the devaluation of the rupee (a deliberate cut in its official value) and the LPG (Liberalisation, Privatisation and Globalisation) reforms.

• These steps moved India towards today's managed float. Under a managed float, the market sets the rupee's rate, but the RBI steps in to smooth sharp swings.

• Autonomous imports in India: essential crude oil and defence equipment are the textbook examples. India must buy them whatever its income level.

Don't confuse with

• Export: an export is a good or service sold to the rest of the world. It is an injection that raises domestic income. An import is a leakage that lowers demand for domestic output.
• Domestic demand for goods (C + I + G) vs demand for domestic goods (C + I + G + X − M): domestic demand includes residents' spending on imports. Demand for domestic goods subtracts imports.

• Example: C + I + G = 500, X = 80, M = 100. Domestic demand is 500, but demand for domestic goods is only 480.

• Autonomous imports (M̄) vs induced imports (mY): M̄ does not depend on income. mY rises with income. Only m changes the size of the multiplier.

• Savings and taxes: these are also leakages. The trap is thinking imports are the only leakage. The three leakages are S, T and M.

Prelims Hooks

• Imports are a leakage and exports are an injection. Savings and taxes are also leakages. Investment and government spending are also injections.
• Import function: M = M̄ + mY, where m = ΔM/ΔY and 0 < m < 1. If M = 60 + 0.06Y, then m = 0.06.
• In Y + M = C + I + G + X, imports sit on the supply side. In Y = C + I + G + X − M, they are subtracted from demand.
• Open-economy multiplier = 1/(1 − c + m), which is always smaller than 1/(1 − c). With c = 0.8 and m = 0.3, the multipliers are 2 (open) and 5 (closed).
• A higher marginal propensity to import makes the AD curve flatter. A rise in autonomous imports reduces output: ΔY/ΔM̄ = −1/(1 − c + m).
• Imports rise with domestic income and fall when the real exchange rate rises.

Mains Points

• Imports and the reach of fiscal stimulus (GS-III):
• A high marginal propensity to import means part of any government stimulus "leaks" abroad, so the domestic multiplier is smaller.
• This is part of the case for Make in India and PLI (Production Linked Incentive) schemes.

• The trade-off is that pushing m down through protection can cost the economy efficiency and competitiveness.

• Growth led by government spending vs growth led by exports:

• NCERT Q13/Q14 show that a rise in output led by government spending pulls in imports and worsens net exports.
• A rise in output led by exports improves net exports.

• India's services exports and remittances help pay for its imports and keep the CAD small, at about 0.6% of GDP in 2024-25 [2][3].

• Import dependence and external vulnerability:

• In 1991, India financed its imports by borrowing until its reserves could not cover even two weeks of imports.
• The "twin deficits" pattern (a budget deficit and a trade deficit at the same time), a small CAD and a managed float are the lessons India took from that crisis.

Related concepts

• Open economy
• Closed economy
• External sector
• Export
• Demand for domestic goods
• Net exports
• Marginal propensity to import
• Autonomous imports

Read more

• The open economy: three linkages, trade as injection and leakage