ELEMENTARY THEORY OF THE MULTIPLIER.
The theory of the multiplier states that an increase in consumer or business investment spending in a country would produce a multiplier effect by raising the level of national income.
In other words, the multiplier is the figure by which an increase in total expenditure in the country may be multiplied to get the resulting increase in the national income.
What is an income theory of the multiplier?
The multiplier is also referred to as the ratio of changes in national income to changes in autonomous expenditure which led to it===theory of the multiplier
The multiplier effect can be a result )f changes in consumption expenditure, which is known as consumption multiplier, or investment changes, which is known as investment multiplier
Using the investment multiplier as an example if a M3 million increase in total investment in a country leads to a M9 million increase in national income, the multiplier is therefore equal to three.
The multiplier is a system used in all types of spending in a country by individuals, firms and the government.
The multiplier, denoted by K, is usually calculated with the aid of a formula:
- K = 1 = 1
1 – MPC MPS
- K = DY
DC or 1
Where
K = Multiplier
MPC = Marginal Propensity to Consume
MPS = Marginal Propensity to save
Y = Change in national income
C = Consumption Expenditure
I = Investment
A knowledge of the marginal propensity to consume or the marginal propensity to save helps us to know the multiplier.
And knowledge of the multiplier helps us to know the extent to which consumption expenditure on investment should be increased or decreased to achieve the desired level of income== theory of the multiplier
The higher the MPC, the higher the multiplier effect and the higher the MPS, the lower the multiplier effect. Therefore, a higher MPC increases national income while a higher MPS will reduce it.
Suppose the MPC is 0.75. This means that 0.75 of every additional income will be consumed. The amount saved will be 1- 0.75 = 0.25, since MPC + MPS = 1
The multiplier, the MPC and MPS are related by the formula:
K = 1
1 – MPC
Since 1 – MPC = MPS, this implies that
K = 1 Where K is the multiplier
MPS
Example 1
- If the marginal propensity to consume is 0.8, calculate the multiplier
- By how much must consumption expenditure be increased to increase income by N10,000.00
Solution
K = 1 = 1
1 – MPC 1 – 0.8
= 1
0.2
The multiplier K has a value of 5
b. K = ∆Y
∆C
4 = N10,000.00
C
4C = N10,000.00
C N10,000.00
4
C = N2,500.00
Example 2
If the marginal propensity to consume is 0.75, by how much will national income increase if government expenditure is increased by 68 million?
Solution
K = 1 = 1
1 – MPC 1 – 0.75
= 1
0.25
= 4
K = ∆Y
∆C
4 = ∆Y
N8m
DY = N8m x 4
DY = N32m
The national income will increase by N32million which is an example of the theory of the multiplier
Example 3
When government investment changed from N500m to N800m, the marginal propensity to consume was 0.6. Determine the changes in national income level.
Solution
∆Y = 1
∆I 1 – MPC
∆Y x 1 – MPC = ∆I
∆Y = ∆1
1 – MPC
∆Y = N800m – N500m
1 – 0.6
∆Y = N300m
0.4
∆Y = N750m
Changes in national income level is N750m
general concept of the elementary theory of the income multiplier
The theory of the multiplier is an economic concept that explains how changes in spending can have a multiplier effect on the overall economy.
It is based on the idea that when an injection of spending occurs, it creates a ripple effect, leading to increased income and further spending.
The multiplier effect is typically associated with fiscal policy, particularly government spending. According to the theory, when the government increases its spending, it injects money into the economy.
This initial spending creates income for those who receive government contracts or work on government projects.
As a result, these individuals have more money to spend on goods and services produced by other businesses.
The increased spending by individuals then generates more income for those businesses, who, in turn, have more money to spend on their inputs, such as wages, raw materials, and other goods and services.
This process continues in a chain reaction, leading to multiple rounds of increased spending and income generation.
The multiplier effect arises because when individuals and businesses spend more, it creates a demand for goods and services, which prompts firms to produce more.
This increased production requires hiring more workers and purchasing more inputs, thereby generating additional income.
The size of the multiplier depends on several factors, including the marginal propensity to consume (MPC), which measures the portion of additional income that individuals spend.
The formula for calculating the multiplier is: Multiplier = 1 / (1 – MPC)
For example, if the MPC is 0.8 (indicating that individuals spend 80% of additional income), the multiplier would be 5 (1 / (1 – 0.8) = 5).
This means that for every $1 increase in government spending, the overall income in the economy would increase by $5.
The multiplier effect can also work in reverse.
If there is a decrease in spending, such as through government austerity measures or a decrease in consumer spending,
it can lead to a negative multiplier effect, where reduced spending causes a contraction in the economy.
It\’s important to note that the multiplier effect is a simplification of a complex economic system and there are various assumptions and limitations associated with it.
For instance, it assumes that all additional income is spent and that there are no leakages (e.g., savings, imports, taxes) from the spending flow.
Additionally, the multiplier effect can vary depending on the economic conditions and the nature of the spending or investment.
LIVER FLUKE
162. ECTO PARASITES
163. TICK
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Originally posted 2025-01-18 18:39:47.