The document discusses John Maynard Keynes' concept of the multiplier. It defines the multiplier as measuring how much national income increases as a result of an increase in investment. The size of the multiplier depends on the marginal propensity to consume (MPC), with a higher MPC resulting in a larger multiplier and greater increase in national income from a given increase in investment. The multiplier captures how an initial increase in investment leads to further rounds of consumption and income increases through the MPC.

1. Concept of Multiplier - Economics

2. John Maynard Keynes, 1919 and 1945

3. CONCEPT OF MULTIPLIER
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.

4.  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.

5. MARGINAL PROPENSITY TO CONSUME
 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

6. INVESTMENT
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

7. 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
.

8. 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)
C
0
= Autonomous consumption
C
y
= Marginal propensity to consume
The marginal propensity to consume plays a
central role in the Keynesian system. Keep your eye on
the MPC in the following slides.

9. MULTIPLIER
• CHANGE IN INVESTMENT LEADS TO CHANGE IN
NATIONAL INCOME
 CHANGE IN NATIONAL INCOME IS A MULTIPLE OF
CHANGE IN INVESTMENT
 THIS MULTIPLE IS TERMED AS MULTIPLIER OR
INVESTMENT MULTIPLIER
 INVESTMENT MULTIPLIER IS A MEASURE OF CHANGE IN
NATIONAL INCOME AS A RESULT OF CHANGE IN
INVESTMENT.
 EG. NATIONAL INCOME INCREASES BY 300CR AS A
RESULT OF INCREASE IN INVESTMENT OF 100CR
 K=3(300/100)

10. ASSUMPTIONS OF MULTIPLIER
 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

11. FEATURES OF MULTIPLIER
 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

12. SIZE OF MULTIPLIER
 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

13. USES OF MULTIPLIER
 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

14. LIMITATIONS OF A MULTIPLIER
 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

15. IMPORTANCE OF MULTIPLIER
 USEFUL TO ANALYZE PUBLIC INVESTMENT
 REMOVES DEPRESSION THROUGH GOVERNMENT
INVESTMENT
 ACHIEVING FULL EMPLOYMENT
 MARGINAL EFFICIENCY OF CAPITAL EMPLOYMENT RISES
 PRIVATE INVESTMENT ENCOURAGED

16. 3 CONCEPTS OF MULTIPLIER
 STATIC MULTIPLIER
 COMPARATIVE STATIC MULTIPLIER
 DYNAMIC MULTIPLIER

17. EMPLOYMENT 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.

18. MULTIPLIER AND UNDERDEVELOPED
COUNTRIES
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
EMPLOYMENT.

19. LEAKAGES IN INCOME STREAM AND THEIR
EFFECT ON MULTIPLIER
 PAYING OF DEBTS
 IDLE CASH BALANCES.
 IMPORTS.
 PURCHASE OF EXISTING SECURITIES.
 PRICE INFLATION

20. 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

21. 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