Foreign Trade Multiplier, Input-Output Analysis and Consumption Function

Abstract

There has long been certain defects in the treatment of imported intermediate goods in the usual Keynesian foreign trade multiplier analysis. In its fundamental equation for an open economy, $Y + M = C + I + E$, the external sector is combined inconsistently with the domestic sector in the circular flow. Y stands for net national product excluding intermediate goods, while M stands for imported goods. Including intermediate products.

This chapter appeared originally, under the same title, in The Quarterly Journal of Economics, Vol. 74, No. 1, Feb. 1960, and is reproduced with minor revisions and with some additions to the Tables. The author is indebted to Mr. Shingo Masegi, professor of Yokohama City University, for the mathematical formulation in Section VI.