US Imports and Disposable Income Research Paper

Pages: 5 (1435 words)  ·  Bibliography Sources: 2  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

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¶ … U.S. disposable income and U.S. imports. In other words, we are trying to establish a link between the two to understand how fluctuations in the former can cause the latter to increase or decrease. The topic is important because over the years we have seen increasing dependence of U.S. On foreign products as its imports have been on the rise. This is not exactly a desirable situation because it shows weakening local production capacity. The imports in the area of crude oil have noticeably increased almost touching 74% since 1985 when domestic production was at its highest. We need to explore the factors which may be affecting imports including income. When disposable income increases, people have greater purchasing power which means they demand more. This demand however may not always be met with equally enthusiastic response from the production side due to capacity restrictions. This is when a country has to depend on imports.

While every country would want to see an increase in the income of its people, it doesn't want this to correspond with rapidly increasing imports and shrinking local production capacity. But this appears to be the trend in the U.S. where production has not been able to keep up with increase in income.

The topic is important because over the last few decades, there has been a significant change in disposable income of Americans and U.S. imports have likewise increased in some areas and decreased in others. It is thus very critical for correct determine of income elasticity to study the effects of changes in income on U.S. imports. While it is generally believed that income changes would result changes in import levels but the kind of changes that occur may be drastically different from one country to another.

In the U.S. For example, it was noticed that income increases led to an increase in imports but a relatively slower growth rate compared to Japan where increase in income led to a decrease in imports and a much higher growth rate.

Thus came the concept of income elasticity into play. We must understand income elasticity to be able to understand what happens to import levels when income changes and how it affects different countries differently.

Income elasticity for demand for imports refers to the degree of change in import level as income changes. Overall a change is noticed in world trade (imports and exports) as world income changes. This phenomenon then affects each individual country as well though not in the same manner. There are several interrelated concepts in this argument which must be clearly understood such as comparative advantage, income elasticity in developing countries compared to developed ones and the role of higher income groups in determining demand and income's effect on consumption etc.

Comparative advantage theory suggests that when a country has comparative advantage in one area, income changes will lead to higher exports in that area and lower imports. For example U.S. have a comparative advantage in production of services compared to production of goods. OECD Economic Outlook 2004 explained, "…the United States has more of a comparative advantage in the production of services, particularly new economy services, than goods. If this is true then further liberalization of trade in services, together with deeper investment in new economy services by U.S. trading partners, would increase the size of this sector within U.S. trade and thus narrow the overall asymmetry." (p. 163)

Income elasticity also affects countries differently depending on variety of factors including their level of development and labor prices.

"….the deceleration of the growth of manufactured imports from the developing countries can be attributed to the decline in GNP growth rates in the developed countries rather than to increased protection. In fact, the apparent income elasticity of demand for manufactured goods imported from the developing countries (the ratio of the rate of growth of these imports to that of GNP) continued to increase…" (Balassa, p.9)

For this paper, we have studied two articles titled "Inequality and the U.S. import demand function" by Magarita Katsimi and "Relationship between GDP, imports and U.S. production of crude oil" by Imad Jabir. The two articles are connected with our chosen topic and show how income affects imports.

The first paper by Katsimi uses a specific model of trade to see how… [end of preview; READ MORE]

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US Imports and Disposable Income.  (2010, December 12).  Retrieved January 22, 2020, from https://www.essaytown.com/subjects/paper/imports-disposable-income/1745793

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"US Imports and Disposable Income."  12 December 2010.  Web.  22 January 2020. <https://www.essaytown.com/subjects/paper/imports-disposable-income/1745793>.

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"US Imports and Disposable Income."  Essaytown.com.  December 12, 2010.  Accessed January 22, 2020.
https://www.essaytown.com/subjects/paper/imports-disposable-income/1745793.