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    Concept of Multiplier

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    vivek.birla
    The document discusses John Maynard Keynes's concept of the multiplier and how it relates to aggregate demand, national income, and consumption. It explains that as investment increases, national income increases proportionately more depending on the marginal propensity to consume (MPC). A higher MPC means national income will increase more due to investment. The multiplier is a tool used to analyze economic growth, planning, and fluctuations and depends on factors like MPC, production efficiency, and full employment.

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    Concept of Multiplier

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    vivek.birla
    9K views21 pages
    The document discusses John Maynard Keynes's concept of the multiplier and how it relates to aggregate demand, national income, and consumption. It explains that as investment increases, national income increases proportionately more depending on the marginal propensity to consume (MPC). A higher MPC means national income will increase more due to investment. The multiplier is a tool used to analyze economic growth, planning, and fluctuations and depends on factors like MPC, production efficiency, and full employment.

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    The document discusses John Maynard Keynes's concept of the multiplier and how it relates to aggregate demand, national income, and consumption. It explains that as investment increases, national income increases proportionately more depending on the marginal propensity to consume (MPC). A higher MPC means national income will increase more due to investment. The multiplier is a tool used to analyze economic growth, planning, and fluctuations and depends on factors like MPC, production efficiency, and full employment.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT or read online from Scribd
    Download as ppt
    9K views21 pages

    Concept of Multiplier

    Uploaded by

    vivek.birla
    The document discusses John Maynard Keynes's concept of the multiplier and how it relates to aggregate demand, national income, and consumption. It explains that as investment increases, national income increases proportionately more depending on the marginal propensity to consume (MPC). A higher MPC means national income will increase more due to investment. The multiplier is a tool used to analyze economic growth, planning, and fluctuations and depends on factors like MPC, production efficiency, and full employment.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT or read online from Scribd
    Download as ppt
    of 21

    Concept of Multiplier - Economics

    John Maynard Keynes, 1919 and 1945


    THE AGGREGATE DEMAND IS
    COMPOSED OF :

    1. CONSUMPTION DEMAND
    2. INVESTMENT DEMAND

    FROM THE CONCEPT OF MULTIPLIER IT


    IS KNOWN HOW MUCH OR HOW
    MANY TIMES INCOME INCREASES AS
    INVESTMENT IS DONE.
    AS INVESTMENT INCREASES
    NATIONAL INCOME INCREASES
    PROPORTIONATELY MUCH MORE.

    HOW MANY TIMES IT INCREASES


    DEPENDS ON MPC.

    HIGHER THE MPC THE NATIONAL


    INCOME WILL BE GREATER DUE TO
    INVESTMENT.
    RATIO OF CHANGE IN CONSUMPTION
    TO CHANGE IN INCOME INDICATE
    THAT PART OF ADDITIONAL INCOME
    WHICH IS NOT SPENT ON
    CONSUMPTION.
    EG. NATIONAL INCOME = 1200CR
    FROM 1000CR
    CONSUMPTION EXPENDITURE =
    900CR FROM 800CR
    MPC = 100/200 =.5
    THAT PART OF INCOME WHICH IS USED
    FOR FURTHER PRODUCTION
    EXPENDITURE MADE FOR THE
    CREATION OF NEW CAPITAL ASSETS
    LIKE MACHINE, TOOLS, BUILDING ETC.

    TYPES OF INVESTMENT –

    AUTONOMOUS INVESTMENT
    PRIVATE OR PUBLIC INVESTMENT
    INDUCED INVESTMENT
    The Keynesian system:
    Planned and actual
    investment
    Investment has three components:
    • Plant and equipment -- drill presses,
    factory buildings, etc.
    • Residential investment -- new
    housing construction
    • Inventory investment -- Change in
    Business Inventories
    The Consumption Function: the key to Keynes

    Consumption depends on the level of DISPOSABLE


    INCOME (disposable personal income = income -
    taxes = Y - T)
    Some consumption is autonomous (= “independent” of
    DPI): it may depend on other factors such as
    wealth or stock values. (even at zero income, Bill
    Gates would consume something)
    The consumption function proposed by Keynes is:

    C = C 0 + C y ( Y - T)

    C0 = A utono mo us c on sum ptio n

    Cy = Margi na l p rop ens ity t o co ns ume

    The marginal propensity to consume plays a


    central role in the Keynesian system. Keep your eye on
    the MPC in the following slides.
    THERE IS AUTONOMOUS INVESTMENT IN ECONOMY
    MARGINAL PROPENSITY TO CONSUME REMAINS
    CONSTANT
    CONSUMPTION IS THE FUNCTION OF CURRENT
    INCOME
    NO TIME LAG BETWEEN RECIEPT OF INCOME AND ITS
    DISPOSAL IN FORM OF CONSUMPTION
    NET INCREASE IN INVESTMENT
    SUPPLY OF CONSUMER GOODS IS ALWAYS IN
    ECONOMY
    IT IS ASSOCIATED WITH CHANGE IN
    INVESTMENT
    SIZE OF MULTIPLIER DEPENDS UPON
    SIZE OF MPC
    MULTIPLIER WORKS IN BOTH FORWARD
    AND BACKWARD DIRECTION
    VALUE OF MULTIPLIER VARIES FROM
    UNITY TO INFINITY
    HIGHER THE MPC –LARGER THE
    MULTIPLIER SIZE
    LARGEST POSSIBLE MPC IS UNITY
    IF MPC IS ZERO MULTIPLIER IS UNITY
    K=1/1-MPC THAT IS RECIPROCAL OF
    MARGINAL PROPENSITY TO SAVE
    TOOL OF ANALYSYING GROWTH,
    PLANNING, PROJECTING,
    INVESTMENT REQUIREMENT
    TOOL FOR ACHIEVING TARGETED
    GROWTH RATE, IF MPC IS GIVEN
    TOOL FOR ANALYSING THE
    FLUCTUATIONS IN THE ECONOMY
    IMPORTANT TOOL FOR ANALYSING
    IMPACT OF TAXATION, FOREIGN
    TRADE ON THE ECONOMY
    MULTIPLIER DEPENDS ON A LARGE
    NUMBER OF FACTORS ALONG WITH MPC
    EFFICIENCY OF PRODUCTION
    REGULAR INVESTMENT
    MULTIPLIER PERIOD
    FULL EMPLOYMENT CEILING
    ASSUMPTION THAT GOODS AND SERVICES
    ARE AVAILABLE IN ADEQUATE SUPPLY
    GOODS AND SERVICES CANNOT BE
    PRODUCED IN EXCESS OF THEIR FULL
    EMPLOYMENT LEVEL
    USEFUL TO ANALYZE PUBLIC
    INVESTMENT
    REMOVES DEPRESSION THROUGH
    GOVERNMENT INVESTMENT
    ACHIEVING FULL EMPLOYMENT
    MARGINAL EFFICIENCY OF CAPITAL
    EMPLOYMENT RISES
    PRIVATE INVESTMENT ENCOURAGED
    STATIC MULTIPLIER
    COMPARATIVE STATIC MULTIPLIER
    DYNAMIC MULTIPLIER
    PROPOUNDED BY KAHN
    GOVERNMENT UNDERTAKES PUBLIC
    WORKS,THIS LEADS TO INITIAL AND
    PRIMARY EMPLOYMENT.
    THIS RESULTS IN INCREASE IN DEMAND
    FOR CONSUMPTION GOODS WHICH IN
    TURN PROVIDES MORE EMPLOYMENT.
    Does not applies to
    underdeveloped countries like
    India.
    REASONS:
    1.DEMANDS CAN BE MET EASILY IN
    DEVELOPED COUNTRIES.
    2.SUPPLY OF RAW MATERIALS IS ELASTIC
    IN DEVELOPED COUNTRIES.
    3.THERE IS NO INVOLUNTARY
    PAYING OF DEBTS
    IDLE CASH BALANCES.
    IMPORTS.
    PURCHASE OF EXISTING SECURITIES.
    PRICE INFLATION
    Keynesian equilbrium: Solution procedure
    Start with the equation in general form:

    Y = C0 + Cy ( Y - T) + Ip + G + NX
    Substitute in the given numbers:
    Y = 300 + 0.8 ( Y - 1000) + 1500 + 1200 + 500
    Collect all the constant terms:
    Y = 3500 + 0.8Y - 800
    Y = 2700 + 0.8Y
    Subtract 0.8 Y from both sides of the equation:

    0.2 Y = 2700
    Finally, multiply both sides by 1 / 0.2 = 5

    Y = 5 (2700) = 13, 500


    The Multiplier
    Rerun the previous exercise, raising planned investment by 500.
    Y = 300 + 0.8 ( Y - 1000) + 2000 + 1200 + 500
    Collect all the constant terms:
    Y = 4000 + 0.8Y - 800
    Y = 3200 + 0.8Y
    Subtract 0.8 Y from both sides of the equation:

    0.2 Y = 3200
    Finally, multiply both sides by 1 / 0.2 = 5
    Y = 5 (3200) = 16, 000
    GDP is UP BY 2,500, NOT up by only 500.
    Investment spending has a MULTIPLIER EFFECT of 5

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