The multiplier analysis , Macroeconomics


Multiplier analysis explains what happens to circular flow of economic life when the behavior of one of the sectors or the components of aggregate demand - consumption, investment, government spending or net exports - changes spontaneously. Technically speaking such a behavioral change is called an autonomous shift (movements that are imposed on the system from outside) in demand. Multiplier theory also includes induced changes, the reactions that spread the effects of autonomous shifts and multiply them. If there is a drastic increase in government spending or private investment spending, the full effects of the increase on income and employment can be calculated by applying multiplier analysis. This calculation would consist of three stages. The first stage would describe the circular flow among various sectors before the increase in spending. The second would be the magnitude of change. The third would consist of the laws of behavior of the sectors of the economy and a clear picture of the pattern of flows among them. We have already discussed most of this material in the previous chapters in learning about the circular flow and connections among various sectors. This chapter will not contain many new concepts, but combine familiar information in new patterns to build multiplier analysis.

The multiplier was first incorporated into macroeconomic analysis in the 1930s when J. M. Keynes made it the cornerstone of his models of income determination in explaining the Great Depression of 1930s. Since then, the concept has been refined and quantified, so that it is now one of the most useful concepts that economists use for studying short-term changes in income and employment.

When an economist speaks of the 'multiplier', he or she may be referring to a number, a theory or analysis, or dynamics of a process. The multiplier analysis states that in a market economy any autonomous change in real planned demand for output leads to a cumulative reaction in the equilibrium level of production i.e. some multiple of the autonomous change that made it expand. The process of multiplier is nothing but the working out of this cumulative response through a definite sequence of actions and reactions among the various sectors of the circular flow. The aggregate of the cumulative reaction in output and income relative to the autonomous change in demand is the 'multiplier number'.

Here the interesting thing is that the 'multiple' is not one for one. But, it magnifies small autonomous changes in aggregate demand into larger fluctuations in output and national income or GNP. We can infer two aspects from this:

        i. A general economic decline or stagnation may have a specific and localized origin even though all                  sectors of the economy are trouble spots. The sources of this trouble may well be in the specific                problems of a single core industry. This helps in understanding economic fluctuations considerably as            it helps to pinpoint the sources of instability.

      ii. The second aspect is that it shows a remedy for the problem of instability and fluctuations. If the               government can limit autonomous changes in aggregate demand, or neutralize them with stabilizers           elsewhere in the economy, then relatively government intervention can prevent widespread instability in  GNP.

These two aspects of multiplier analysis accounts for its appeal to economists and policy makers who think that government can intervene in economic activity in correcting economic fluctuation of the market economy. Further in analyzing economic change, it is essential to distinguish between those movements that are imposed on the system from outside and those that result from the general behavior of the system itself. The first of these two kinds of change is called autonomous government spending. Investment spending and exports are principal examples. The second kind is called induced. The distinction between these two kinds of change is essential for understanding the working of multiplier process. 

Posted Date: 9/13/2012 6:58:35 AM | Location : United States

Related Discussions:- The multiplier analysis , Assignment Help, Ask Question on The multiplier analysis , Get Answer, Expert's Help, The multiplier analysis Discussions

Write discussion on The multiplier analysis
Your posts are moderated
Related Questions
Example of Introducing the Government- ACCOUNTING SYSTEM   So far there was no government in any of our stylized economies. Let us now introduce it. To begin with, our governmen

a health club sells 50 memberships when the monthly price is $60 and 70 memberships when the monthly price is $40. the price elasticity of demand for memberships at this health clu

We will continue with the familiar demand curve homework the previous section Let the market demand for goods be with a linear curve:    (p =A q D /10), where it is known

The hypotheses are: The null hypothesis,  infers that a unit root exists, whereas the alternative hypothesis,  concludes that there is no root. Decision rule:

What is the different between price effect and sales effect? Both relate to Elasticity and Total Revenue: a. A price effect: After a price raise, all unit sold sells at a hi

Aggregate Supply and Demand 1. The equation for expenditure GDP is 2. Sketch a fully labeled aggregate supply and demand diagram for an economy that is in full employment equ

Sara runs a small business assembling personal computers. This table shows her total cost at different levels of output. Number of computers produced

The Neoclassical thinking that assumes that all firms are established with the intention of making profit has been challenged by the managerial discretion models. How successful ha

assume the cost of a market basket in 2008 is 1717.0. Calculate the cost of the same basket of goods and services in 2007. Price index in 2008 was 100 and price index in 2007 was

You are developing a sampling protocol whereby you're going to insert a probe into a turbulent flow in a circular conduit of radius R. a. Using a description of a velocity profi