Imagine the economy as a big round‑about where households, firms, the government and the rest of the world keep traffic moving.
Households give labour to firms and receive income (wages, profits, rents).
Firms use that labour to produce goods and services and sell them back to households.
The money that moves back and forth is called the income flow.
When households buy goods that were made abroad, the money leaves the domestic economy.
These outflows are called imports (M).
The rest of the world is the “outside” of the circular flow diagram, and imports are the bridge that connects the two circles.
Just like we talk about how much people spend on food or entertainment, economists measure how much of income is spent on imports.
Two key measures are:
📊 Formulas (written in LaTeX for clarity):
| Measure | Formula |
|---|---|
| Average Propensity to Import | \$apm = \dfrac{M}{Y}\$ |
| Marginal Propensity to Import | \$mpm = \dfrac{\Delta M}{\Delta Y}\$ |
Suppose a household earns £5,000 a month and spends £1,000 on imported gadgets.
apm = \$1,000 ÷ 5,000 = 0.20\$ (or 20 %).
If next month the household’s income rises to £5,500 and imports rise to £1,200, then
\$ΔM = 1,200 - 1,000 = 200\$ and \$ΔY = 5,500 - 5,000 = 500\$, so
mpm = \$200 ÷ 500 = 0.40\$ (or 40 %).
| Month | Income (£) | Imports (£) | apm |
|---|---|---|---|
| Month 1 | 5,000 | 1,000 | 0.20 |
| Month 2 | 5,500 | 1,200 | 0.218 |
Remember:
|
🚀 By understanding how much of our income goes abroad, we can see how the circular flow keeps the economy moving and how changes in income affect international trade. Keep practising with different numbers to master the concepts!