The Working of the Multiplier
The Multiplier and Keynesian Economics
The concept of the multiplier process became important in the 1930s when John Maynard Keynes suggested it as a tool to help governments to achieve full employment. This macroeconomic “demand-management approach”, designed to help overcome a shortage of business capital investment, measured the amount of government spending needed to reach a level of national income that would prevent unemployment.
The theory of multiplier occupies an important place in the modern theory of employment. The concept of multiplier was first developed by F.A. Kahn and was then refined by Keynes in 1930s. Keynes multiplier is also known as the “Investment or income multiplier” as he refers to the concept with increase in investment and income. The essence of multiplier is that total increase in income; output and employment manifold the original increase in the investment.
Let us consider that the government undertakes investment expenditure on some public works, say the construction of rural roads. For this the government remunerate to all who are contributing to the work of the road building. Since the income of the road building contributors has increased they will be spending this income on their consumptions and savings. When they purchase their consumer goods, the income of the people who sell these goods increases, who will further be spending the income on their consumptions and savings. This will further increase incomes of some other people and the chain of consumption expenditure would continue and the income of the people will go on increasing. But every additional increase in income will be progressively less since a part of the income received will be saved. Thus we see that the income will not increase by only the initial investment but by many times more.
The higher is the propensity to consume domestically produced goods and services, the greater is the multiplier effect. The government can influence the size of the multiplier
The concept of the multiplier process became important in the 1930s when John Maynard Keynes suggested it as a tool to help governments to achieve full employment. This macroeconomic “demand-management approach”, designed to help overcome a shortage of business capital investment, measured the amount of government spending needed to reach a level of national income that would prevent unemployment.
The theory of multiplier occupies an important place in the modern theory of employment. The concept of multiplier was first developed by F.A. Kahn and was then refined by Keynes in 1930s. Keynes multiplier is also known as the “Investment or income multiplier” as he refers to the concept with increase in investment and income. The essence of multiplier is that total increase in income; output and employment manifold the original increase in the investment.
Let us consider that the government undertakes investment expenditure on some public works, say the construction of rural roads. For this the government remunerate to all who are contributing to the work of the road building. Since the income of the road building contributors has increased they will be spending this income on their consumptions and savings. When they purchase their consumer goods, the income of the people who sell these goods increases, who will further be spending the income on their consumptions and savings. This will further increase incomes of some other people and the chain of consumption expenditure would continue and the income of the people will go on increasing. But every additional increase in income will be progressively less since a part of the income received will be saved. Thus we see that the income will not increase by only the initial investment but by many times more.
The higher is the propensity to consume domestically produced goods and services, the greater is the multiplier effect. The government can influence the size of the multiplier