Foreign Trade Multiplier

Abstract

Though its ancestry may be traced to certain ideas of the Mercantilist School, the foreign trade multiplier appears in modern form in a textbook (Harrod 1933) written three years before Keynes’s General Theory. There in its simplest form Harrod introduced the familiar equation for the determination of the national income flow consistent with balance in the current account of the balance of payments – that the national income is equal to the product of the volume of national exports and the reciprocal of the average propensity to import. In this form it emphasized the equilibrating role of income over price variations in determining balance of payments adjustment, and the importance that trade performance played in determining the level of activity at which external balance would be achieved.