The coefficient of multiplier and the marginal propensity to import: the case of Latvia

Abstract

Any changes of aggregate expenditure in national economy involve the multiplier effect. Valuing possible effects of macroeconomic policy, one must take into account the coefficient of multiplier. Value of the coefficient depends first of all on the population‟s marginal propensity to consume (MPC) and typically exceeds 1. But besides the MPC there are other factors that may substantially affect the value of multiplier. One of these factors is the marginal propensity to import (MPI). It is usually stated that the MPI cannot exceed 1.

The aim of the paper is to estimate the value of multiplier in Latvian economy in order to check whether this value might prove below 1 due to high MPI. Calculations of the coefficients of multiplier, MPC, and MPI for period of 1995 – 2006 are made by author on the basis of Latvian statistics. Conclusions and implications for macroeconomic policy are suggested.