The Multiplier
- The multiplier ratio is the ratio of change in real income to the injection that created the change
- E.g. If the UK government injected an additional £5m into the economy through government spending and it resulted in an increase in real income of £15m, the value of the multiplier would be 3
- E.g. If the UK government injected an additional £5m into the economy through government spending and it resulted in an increase in real income of £15m, the value of the multiplier would be 3
- The multiplier process is based on the idea that one individual's spending is another individual's income
- An increase in consumption immediately increases AD
- Store owners who have benefitted from the extra consumption now have extra income
- They spend some of that income on goods/services
- Their expenditure on goods/services is now income for the next tier of individuals
- Due to the successive rounds of spending, the final increase in national income is much larger than the initial injection
- The size of the multiplier is entirely dependent on the size of leakages that occur during the process
- The higher the leakages the smaller the multiplier
- The higher the leakages the smaller the multiplier
- An increase in consumption immediately increases AD
- The initial injection shifts AD to the right
- The result of the multiplier process is that there is then a secondary movement of AD to the right which (if the multiplier were 2) may be double the initial movement
- The result of the multiplier process is that there is then a secondary movement of AD to the right which (if the multiplier were 2) may be double the initial movement
- The multiplier can also work in reverse when injections are reduced (downward multiplier effect)