Page 127 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics Hitesh Jhanji, Lovely Professional University

Notes Unit 7: Concept of Multiplier

CONTENTS
Objectives
Introduction

7.1 Concept of Multipliers
7.2 Types and Limitations of Multipliers
7.2.1 Investment Multiplier

7.2.2 Government Spending Multiplier
7.2.3 Tax Multiplier
7.2.4 Balanced Budget Multiplier
7.2.5 Foreign Trade Multiplier
7.3 Static and Dynamic Multiplier

7.4 Summary
7.5 Keywords
7.6 Review Questions

7.7 Further Readings
Objectives

After studying this unit, you will be able to:
Describe the concept of multipliers;
Explain the working of an investment multiplier;
Discuss the working of government spending, tax, balanced budget and foreign trade
multipliers;
State the limitations of multipliers;
Contrast static and dynamic multipliers.

Introduction

R F Kahn developed the concept of multiplier in his article, “The Relation of Home Investment
to Unemployment” in the Economic Journal of June 1931. Kahn’s multiplier was the employment
multiplier. Keynes borrowed the idea from Kahn and formulated investment multiplier.
Keynes considers his theory of multiplier as an important and integral part of his theory of
employment. The multiplier, according to Keynes, establishes a precise relationship, given the
propensity to consumer, between aggregate employment and income and the rate of investment.
It tells us that when there is an increment of investment, income will increase by an amount
which is K times the increment of investment. In the words of Hansen, Keynes’ investment
multiplier is the coefficient relating to an increment of investment to an increment of income.
In this unit, you will learn about the various types of multipliers.

122 LOVELY PROFESSIONAL UNIVERSITY