THE MULPLIER CONCEPT

THE MULPLIER CONCEPT
Multiplier shows how an initial change in consumption, investment and government expenditure brings a multiple change in income.
Multiplier is the ratio of change in the National Income to a change autonomous expenditure.
An initial change in income will lead to greater increase in the final level of equilibrium National Income.
SIZE OF THE MULTIPLIER
The size of the multiplier depends on how much of an increase in income is spent in an economy.
The multiplier is the direct function of marginal propensity to consume (MPC).
The size of multiplier depends upon how large or small is the MPC.
If MPC is high, the value of the multiplier will also be high.
If MPC is small, the value of the multiplier will also be small
MPC and MPS
Y=C+S
Change in Y=change inC + Change in S
Divide through by change in Y
Change in Y = Change in C + Change in S Change in Y Change in Y Change in Y
1= MPC + MPS
MPC = 1-MPS
MPS = 1-MPC
SIZE OF MULTIPLIER…… CONT`D
The value of Multiplier can be obtained by following formula K= 1__
For example if mpc is 0.80 then multiplier will be K= 1 _ = 1_ = K = 5 1-0.8 0.2

ALTERNATE WAY TO FIND K…???
Another way to find out the multiplier is that it is the reciprocal of MPS,
For example if MPC is 0.8 then we can easily find MPS , as we know that MPS = 1- MPC
So K = 1/MPS
K = 1/0.2
K=5
ASSUMPTIONS OF MULTIPLIER
1 MPC is constant.
2 There is no change in prices of commodities.
3 There is closed economy unaffected by foreign influence.
4 There is no change in autonomous investment
CONSUMPTION MULTIPLIER
In consumption multiplier we want to show the effect of consumption on National Income.
Y=f (c), that is NI will change many a time more than the change in consumption.
Change in consumption will have a multiple effect on income.
CONSUMPTION MULTIPLIER
How much income change as a result of change in consumption depends on consumption multiplier (Kc)