The multiplier, Managerial Economics

Assignment Help:

The Multiplier

In his theory Keynes asserted that consumption is a function of income, and so it follows that a change in investment, which we may call ΔI, meaning an increment in I will change Y by more than ΔI.  For while the initial increase in Y, ΔY, will equal ΔI, this change in Y itself produce a change in C, which will increase Y still further.  The final increase in income thus exceeds the initial increase in investment expenditure which is therefore magnified or "multiplied".  This process is called the multiplier process.

The Operation of the "Multiplier" 

The multiplier can be defined as the coefficient (or ratio) relating a change in GDP to the change in autonomous expenditure that brought it about.  This is because the Multiplier can be defined as the coefficient  (or ratio) relating a change in GDP to the change in autonomous expenditure that brought it about.  This is because a change in expenditure, whatever its source, will cause a change in national income that is greater than the initial change in expenditure.

For example, suppose there is an autonomous increase in investment which comes about as a result of decisions by businessmen in the construction industry to increase the rate of house building by, say, 100 houses, each costing £1,000 to build, investment will increase by £100,000.  Now this will be paid out as income to workers of all kinds in the building industry, to workers in industries which supply materials to the building industry, and others who contribute labour or capital or enterprises to the building of the houses; these people will in turn wish to spend these incomes on a wide range of consumer goods, and so on.  There will thus be a series of further rounds of expenditure, or Secondary Spending, in addition to the initial primary spending, which constitutes further increases in GDP.

This is because those people whose incomes are increased by the primary increase in autonomous expenditure will, through their propensity to consume, spend part of their increase in their incomes.  GDP increases through the Expenditure - Income - Expenditure cycle.


Related Discussions:- The multiplier

Product of marginal revenue, Q. Product of marginal revenue? MRPL is th...

Q. Product of marginal revenue? MRPL is the product of marginal revenue and marginal product of labour or MRPL = MR x MPL. • Derivation: MR = ?TR/?Q MPL = ?Q/?L

Cross elasticity, Cross Elasticity Cross elasticity of demand measures...

Cross Elasticity Cross elasticity of demand measures the degree of responsiveness of the quantity demanded of one good (B) to changes in the price of another good (A).  It is

Demand, what is demand estimation

what is demand estimation

Explain about isocost line, Q. Explain about isocost line? In economics...

Q. Explain about isocost line? In economics, an isocost line signifies all combinations of inputs that cost the same total amount. Though, similar to the budget constraint in c

Price wars, on the application of any of the concepts learnt in Managerial ...

on the application of any of the concepts learnt in Managerial Economics. You may try to use these concepts to everyday problems in life or in any of the current debates on in the

Limitations of open market operations, Limitations of Open Market Operation...

Limitations of Open Market OperationsLimitations For their success central bank open market operation assume that commercial banks in the country will expand their credit port

Income elasticity and cross price elasticity, Question: (a) As an advis...

Question: (a) As an advisor to government as well as that to a firm how will you make use of your knowledge on price elasticity of demand, income elasticity and cross price ela

Oligopoly theory, in the context of oligopoly theory explain the channels v...

in the context of oligopoly theory explain the channels via which either a cost reduction or a quantity increase influence a supplier''s profitability

Show the williamson''s approach for team production, For Oliver E. Williams...

For Oliver E. Williamson, existence of firms derives from 'asset specificity' in production, where assets are specific to each other such that their value is much less in a second-

Types of unemployment, TYPES OF UNEMPLOYMENT   A  person  can  be  eith...

TYPES OF UNEMPLOYMENT   A  person  can  be  either  in the labour force  or  not  in  the  labour  force  of  an economy. The person not  included  in  the  labour force includ

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd