Page 137 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes 10. According to the ______________ multiplier G leads to 1/MPS times change in income.
11. In a __________ economy, savings have to equal investments in equilibrium.

7.3 Static and Dynamic Multiplier

Depending on the purpose of analysis, sometimes a distinction is made between the static
multiplier and the dynamic multiplier. The static multiplier is also called ‘comparative static
multiplier’, ‘simultaneous multiplier’, ‘logical multiplier,’ ‘timeless multiplier.’ ‘lagless
multiplier* and ‘instant multiplier’.
The concept of static multiplier implies that change in investment causes change in income
instantaneously. It means that there is no time lags between the chances in invest merit and the
change in income. It implies that the moment a rupee is spent on investment projects, society’s
income increases by a multiple of 1. The concept of multiplier explained in the preceding
section is that of static multiplier. Let us explain the concept of the dynamic multiplier also
known as ‘period’ and ‘sequence’ multiplier.

The concept of dynamic multiplier recognises the fact that the overall change in income as a
result of the change in investment is not instantaneous. There is a gradual process by which
income changes as a result of change in investment or other determinants of income. The
process of change in income involves time lags. The multiplier process works through the
process of income generation and consumption expenditure. The dynamic multiplier takes into
account the dynamic process of the change in income and the change in consumption at different
stages due to change in investment. The dynamic multiplier is essentially a stage-by-stage
computation of the change in income resulting from the change in investment till the full effect
of the multiplier is realized.
The process of dynamic multiplier is described below.

Example: Suppose MPC =0.80 and autonomous investment increases by 100 (i.e.
I 100 ), all other things remaining the same. When an autonomous investment expenditure
of 100 is made on the purchase of capital equipment and labour, the income of the equipment
and labour sellers increases by 100, in the first instance. Let us call it ΔY . Those who receive
1
this income, spend 80 (=100*0.80). As a result, income of those who supply consumer goods
increases by 80. Let it be called ΔY . They spend a part of it 80*0.80= 64. This creates ΔY .
3
2
This process continues until additional income and expenditure are reduced to zero. The whole
process of the computation of the total increase in income ΔY as a result of ΔI = 100 can be
summarized as follows:

ΔY= ΔY ΔY ΔY .................. ΔY
1 2 3 n-1
In numerical terms,
= 100+100(0.8)+100+100+………..+100
= 100+80+64+51.20+……..+0
= 499.999=500
After having calculated the total income effect (K), the multiplier can be calculated as:
ΔY 500
5
ΔI 100

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