X + M/GDP is an index of “openness.” The net export function We assume that exports (X) depend on macroeconomic conditions experienced by trading partners. Imports (M) depend on the health of the domestic economy X + M/GDP is an index of “openness.”

m= M/Y, where: 0< m < 1 The import function Definitions M is imports X is exports E is net exports. Note that: E = X - M MPI = m is the marginal propensity to import out of national income (Y) The import function is given by: M = mY = .10Y M Slope = m 100 m= M/Y, where: 0< m < 1 1,000 Y

Export function could shift down due to: Appreciation of the domestic currency against foreign currencies, ceteris paribus. Falling GDP among trading partners X Xa Exports Y = GDP