What is the interpretation of m Subscript 0 and m Subscript 1? The interpretation of m 0 is the marginal propensity to import, while the interpretation of m 1 is the autonomous level of import.
The correct answer and explanation is:
Correct Answer: False
The correct interpretation is the opposite of what is stated:
- m0m_0 is the autonomous level of imports.
- m1m_1 is the marginal propensity to import.
Explanation (300 words)
In macroeconomics, particularly in open economy models, the import function is often expressed as: M=m0+m1YM = m_0 + m_1Y
Where:
- MM = total imports
- m0m_0 = autonomous imports
- m1m_1 = marginal propensity to import
- YY = national income or output
Interpretation of m0m_0: Autonomous Imports
Autonomous imports (m0m_0) represent the level of imports that occur regardless of the country’s income level. These are the imports that happen even when national income is zero. For example, a country might still import essential goods like medicine, oil, or defense equipment even if its income level is very low. These imports are “autonomous” because they do not depend on income or GDP.
Interpretation of m1m_1: Marginal Propensity to Import
The marginal propensity to import (m1m_1) shows how much imports increase when income increases by one unit. In other words, it is the slope of the import function and reflects how responsive imports are to changes in income. If m1=0.2m_1 = 0.2, for example, then for every additional dollar of national income, imports increase by $0.20. This value is usually between 0 and 1.
Conclusion
So, contrary to the original statement, m0m_0 is not the marginal propensity to import—it is the autonomous import level, while m1m_1 is the marginal propensity to import, not the autonomous import level. Understanding this distinction is key when analyzing the behavior of imports in economic models.