The open economy multiplier calculates how much a change in initial spending will increase the total national income in a country that participates in international trade.

Unlike a closed economy, an open economy includes imports, which act as a leakage—money leaving the local circular flow of income.

Formula: Open economy multiplier = 1 / (1 − MPC + MPM + MRT)

Key features:

• An open economy trades with other countries by exchanging exports and imports.
• The denominator (1 − MPC + MPM + MRT) accounts for three main leakages: savings, taxes, and imports.
• The Marginal Propensity to Import (MPM) lowers the multiplier because money spent on foreign goods does not contribute to domestic production.
• Because of this extra leakage, the multiplier for an open economy is always smaller than that of a closed economy.
• Economists use this tool to estimate how shifts in autonomous consumption, investment, or exports affect the overall economy.