bathtub theorem

Bathtub theorem is an analogy that explains the effects of exports and imports on national income.

According to the analogy used in the bathtub theorem, national income level is the water in the bathtub. Exports, government spending, or investments inject extra water in the tub, and thus raise the level, while imports, savings, or taxes cause leakages.

According to the same analogy, there will be a neutral effect on the water (or national income) level if exports equal imports, an expansionary effect if exports exceed imports, and finally, a contractionary effect if imports exceed exports.

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