MULTIPLIER

MIDHUN MADHAVAN MBA

INTRODUCTION
The concept of multiplier was developed by R.F.Kahn in his article the relation of home investment to unemployment in the economic journal of June 1931. kahns multiplier was the employment multiplier. Keynes took the idea from kahn and formulated investment multiplier.

Investment multiplier
Keynes consider his theory of multiplier as an integral part of his theory of employment.

definition
the multiplier, according to Keynes, Establishes a precise relationship, given the propensity to consume, between aggregate employment and income and the rate of investment. It tells as that, when there is increment of investment income will increase by an amount which is K times the increment of investment cont..

K= Y/I Where , Y is income I is investment is change (increment or decrement) K is the multiplier

MARGINAL PROPENSITY TO CONSUME

The value of multiplier is determined by the marginal propensity to consume. The relationship between the multiplier and the marginal propensity to consume is as follows; Y=c+I

Assumptions of multiplier
Keynesian theory of multiplier works under certain assumptions which limit the operation of the multiplier

Importance of leakages of multiplier

The concept of multiplier is one of the important contributions of Keynes's to the income and employment theory. Its importance lies in the following; Investment Trade cycle Saving-investment equality Formulating of economic policies

Leakages of multiplier
Leakages are the potential diversion from the income stream which weaken the multiplier effect of new investment. They are; Saving Strong liquidity preference Purchase of old stocks and securities Debt cancellation Price inflation

Net imports Undistributed profits Taxations Excess stocks of consumption goods Public investment programes

Working of the multiplier

The multiplier theory explains the cumulative change in investment on income via its effect on consumption expenditure The the sequence analysis which shows a motion picture of the process of income preparation This is the legless instantaneous process in a stat frame work, as explained by Keynes

Criticism of multiplier
Keynes logical theory of multiplier is an instantaneous process without time lag. It is a time less static equilibrium analysis in which the total effect of change in investment on instantaneous According to Hazlitt, Keynesian multiplier is a myth their can be never predeterminable or mechanicable relationship between investment and income

 One of the weaknesses of the multiplier theory is that it studies effects on investment of income through changes in consumption expenditure Keynesian multiplier theory establishes the linear relation between conception and income with hypothesis that the MPC is less than 1 and 0

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