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What is the relationship between macroeconomic multiplier and national income figures?
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in Economics and Finance by Platinum (138,124 points) | 50 views

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The multiplier shows how an increase in spending (injection) produces a more than proportional increase in national income.


- The multiplier effect indicates the overall change in income due to the expenditure (investment) that took place.
- It is calculated by multiplying the value of the multiplier by the total injection (investment).


Explanation:
- The initial spending becomes someone's income
- They spend some and save some
- The spent portion becomes someone else's income
- This someone spends some and saves some
- And so, it goes on ...


This is known as the multiplier effect

 

For example, if you picked up a R100 and spend R75 and decide to save R25.

Then your marginal propensity to consume \((\mathrm{mpc})=\mathbf{0 . 7 5}\) and your marginal propensity to save \((\mathrm{mps})=\mathbf{0 . 2 5}\).

Therefore: \(\mathrm{mpc}+\mathrm{mps}=1\)

There are only two things one can do with new income and that is spend or save it.

 

NOTE:
- Marginal = Additional
- Propensity = Likelihood

by Platinum (138,124 points)

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