"The foreign trade multiplier also known as the export multiplier operates like the investment multiplier of Keynes. It may be defined as the amount by which the national income of a nation will be raised by a unit increase in domestic investment on exports. As exports increase, there is an increase in the income of all persons associated with export industries. These in turn create demand for goods. But this is dependant upon their marginal propensity to save (MPS) and the marginal propensity to import (MPM). The smaller these two marginal propensities are, the larger will be the value of multiplier and vice versa."
In normal parlance. For every dollar directed to domestic investment in exports GDP may grow by as much as $1.50. So, if exports falter then for every $1.00 in export investment reduction GDP must also fall by $1.50.
More open and more integrated an economy is harder it becomes to replace exports with domestic production.
Moreover, since China exports are more labour intensive than ours a reduction in their exports will bring relative higher levels of unemployment. We import a lot of clothing and if that stops what are the Chinese going to do. They will make a fire sale and then will close their factories already operating at the margins. We Export a lot of iron ore and coal and if the exterior demand for that falters what are we going to do? Move the relative few working in that sector plus most of the equipment to investment in infrastructure and housing. Actually that is what we did after the collapse of the mining boom.
