1.
Multiplier Concepts &
Effects
By Atindya K Ghosh

2.
Objectives
Understand the multiplier concept.
Utilise the multiplier formula.
Explain the multiplier determinants.
Analyse the interaction of the multiplier,
accelerator and economic cycle.
Evaluate the significance of marginal
propensity to Save, Tax and Import.

3.
Introduction
In economics or macroeconomics, a multiplier is a
factor of proportionality that measures how much
an endogenous variable changes in response to a
change in some exogenous variable.
For example, suppose variable x changes by 1 unit,
which causes another variable y to change
by M units. Then the multiplier is M.

4.
The Multiplier effect
Process by which any change in a component
of AD results in greater final change in real
GDP.
The size of the multiplier is determined by the
size of the leakages from the circular flow of
income.

5.
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
The circular flow of incomeThe circular flow of income
Firms
Households

6.
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Investment (I)
Government
expenditure (G)
Export
expenditure (X)
BANKS, etc
Net
saving (S)
GOV.
Net
taxes (T)
ABROAD
Import
expenditure (M)
LEAKAGES
INJECTIONS
The circular flow of incomeThe circular flow of income

7.
Let’s assume Government increases spending on
education, raising wages of teachers by `5 Cr. i.e.
Injection.
Teachers spend this money, which in turn becomes
income for other people.
The proportion of income that goes towards leakages is
the Marginal Propensity to Withdraw [MPW].
Let’s assume half the injection goes towards savings, tax
or imports. That means the MPW is 0.5. Then the
question arise, “What happens to the actual GDP?”
The Multiplier effect

8.
Total Income of A
This square represents the initial increase in
income of `5Cr by the Teachers or “A”

9.
If marginal propensity to withdraw is 0.5; half
is spent (MPC 0.5)
Total Income left
for A
Total Expense for A
or Total Income for B

10.
Total Income of A
The amount spent by “A” is income for other
people or “B”
Total Income of B

11.
Total income so far by “A” & “B”
Total Income for both A & B

12.
Half of the new income is spent by “B”
to “C”
Total Income of A
TotalExpense
ofBorTotal
IncomeofC Total Income left for B

13.
Total income so far by “A”, “B” & “C”
Total Income of A
Total Income of C
Total Income of B

14.
Half of the new income of “C” is spent and
becomes income for other people i.e. “D”
Total Income of A
Total Income of B
Total Income
left for C
Total Expense of
C or Total
Income of D

15.
Total income so far by “A”, “B”, “C” &
“D”
Total Income of A
Total Income of C
Total Income of B
Total
Income of
D

16.
Eventually…
The initial `5Cr eventually becomes `10Cr through
the multiplier effect. National income has been
multiplied by factor of 2.
Formulas for Calculating MPW:
MPW = MPS + MPT + MPM
K = 1/[MPS + MRT + MPM] = 1/MPW

17.
Accelerator
The theory of investment that states the level of
investment depends on the rate of change of the
national income.
Recession:
 Firms decreases its investment.
Boom:
 Firms increases its investment.
“Investment mainly depends on RATE OF CHANGE but
not on its actual level.”

18.
Interaction of Multiplier & Accelerator
This is a theoretical explanation of the
Economic Cycle.
Economy growing leads to investment which
leads to a multiplier effect which leads to
further economic growth.
However, if economy in recession the effect
works in the opposite direction.

19.
Evaluating the Interaction of Multiplier &
Accelerator Model
 Economy might be growing, but a question always arise i.e.
whether the business will be sustain or not?
 Investment decisions are large and complex, made well before changes in the
economic conditions.
 Exogenous factors just as influential.
 ‘No more boom and bust’ – Governments can smooth out the economic cycle
through fiscal and monetary policies.
 However, investment is an important component of AD and firms
do respond to consumer demands. The multiplier model is not the
only force behind the economic cycle.

20.
Conclusion
Economist Robert Barro believes that the Keynesian
multiplier is close to zero. For every dollar the
government borrows and spends, spending elsewhere in
the economy falls by almost the same amount.
The modern theory of the multiplier was developed in the
1930s, by Kahn, Keynes, Giblin, and others, following
earlier work in the 1890s by the Australian economist
Alfred De Lissa, the Danish economist Julius Wulff, and
the German-American economist N. A. J. L. Johannsen.

21.
Thank You