LECTURE 5 - MULTIPLIER EFFECT

ECON

OMIC

LECTURE 5

MULTIPLIER EFFECT

STEVEN.REYNOLDS@CITYOFGLASGOWCOLLEGE.AC.UK

keynesian economics

John Maynard Keynes (5 June 1883 – 21 April 1946), was a British economist, whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments.

Keynesian economics is an economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression.

Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression.

RESEARCH TASK

JOHN MAYNARD KEYNES

AN OVERVIEW OF THE ECONOMIC APPROACH

KEY POINTS

MULTIPLIER EFFECT

what is it?

THE MULTIPLIER EFFECT

Workers employed directly on government projects will spend a proportion of their income

National income will be boosted by more than the amount of government spending.

KEY POINTS

KEY POINTS

some of the extra income will be saved or spent on imports

Government spending boosts the economy by more than what is spent

KEY POINTS

KEY POINTS

New workers' wages then go back into the economy

CONCLUSION

INCOME IMPACT

So far we know the direction of changes in the flow i.e. national income will either increase or decrease But…what about the size of changes to national income? If an injection of £10 million occurs, by how much will this increase the flow of income- £10m? It will rise by more than the value of the injection

MULTIPLIER PROCESS

EQUILIBRIUM

MORE INFO

INCREASE PRODUCTION

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EMPLOYMENT

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An increase in an injection will cause an even bigger increase in the level of national income The number of times the increase in national income is greater than the increase in injections is known as the multiplier

CRITICISMS

ADVERSE EFFECT

TIME LAGS

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GOVERNMENT INTERVENTION

CROWDING OUT

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THE MULTIPLIER FORMULA

This concept considers how much extra income will be spent following an increase in income.

The effects of an increase in an injection on national income depend on these two values: MPC The Marginal Propensity to Consume, MPS The Marginal Propensity to Save These values simply reflect the tendency of an individual to spend or save any additional (marginal) income. If savings is the only withdrawal, then households must either consume (spend) or save all income.

INFO

THE MULTIPLIER FORMULA

This concept considers how much extra income will be spent following an increase in income.

The greater the Marginal Propensity to Consume, the greater will be the multiplier effects of the injection on national income. The multiplier process will continue for a longer period of time. The formula for the multiplier is: K = 1/MPS or K = 1/ (1-MPC)

INFO

INFO

SUMMARY OF MULTIPLIER PROCESS

An increase in an injection will result in an even bigger increase in national income. A’ multiplier effect’ is created as those individuals with extra incomes spend more on goods and services which facilitates more employment as firms need to employ more workers and so on… This process will continue until injections and withdrawals are once again equal

OVERVIEW

LESSON RECAP

• To introduce the Multiplier effect of the economy

• To understand the theory and the criticism

To understand the concepts of :

• Marginal Propensity to consume
• Marginal Propensity to save

• To understand how to calculate the Multiplier effect

THANKS

STEVEN.REYNOLDS@CITYOFGLASGOWCOLLEGE.AC.UK