• The multiplier ratio is the ratio of change in real income to the injection that created the change
  • E.g. If the UK government injected an additional ￡5m into the economy through government spending and it resulted in an increase in real income of ￡15m, the value of the multiplier would be 3
• The?multiplier process?is based on the idea that one individual's?spending?is another individual's?income
  • An increase in consumption immediately increases AD
    • Store owners who have benefitted from the?extra consumption?now have?extra income
    • They?spend some?of that income on goods/services
    • Their?expenditure?on goods/services is?now income?for the next tier of individuals
  • Due to the successive rounds of spending, the final?increase?in?national income?is?much larger?than the initial injection
  • The size of the multiplier is entirely dependent on the size of?leakages?that occur during the process
    • The higher the leakages the smaller the multiplier
• The?initial injection shifts AD?to the right
  • The?result?of the multiplier process is that there is then a?secondary movement of AD?to the right which (if the multiplier were 2) may be?double?the initial movement
• The?multiplier?can also?work in reverse?when?injections are reduced?(downward multiplier effect)

• The?'marginal propensities'?refer to the proportion of the?next $ earned?that a consumer saves, consumes, is taxed, or purchases imports with
• Marginal propensities?are calculated for economies and provide insights into how?each additional $ of income?is allocated
  • Sweden has a?higher tendency to save?than the USA
    • Their marginal propensity to save is higher
    • The USA, therefore, has a greater multiplier on any injections into the Circular Flow

An Explanation of The Marginal Propensities

Marginal Propensity to Consume (MPC)	Marginal Propensity to Save (MPS)	Marginal Propensity to Tax (MPT)	Marginal Propensity to Import (MPM)
The proportion of additional income that is?spent	The proportion of additional income that is?saved	The proportion of additional income that is?paid in tax	The proportion of additional income that is spent on?imports

• The?value of the multiplier?can be calculated one of two ways
  • By focusing on the?marginal propensity to consume (MPC)
  • By focusing on the?withdrawals?that occur on each additional $ of income (MPS + MPT + MPM)

1. Focussing on the MPC

   

2. Focusing on the Withdrawals

   

Step 1: Insert the values into the withdrawal formula

Step 2: Multiply the injection by the multiplier

Impact on GDP = Injection x multiplier
??????? ? ? ?= ￡60m x 2

??????? ? ? ?= ￡120m

• The greater the?withdrawals,?the smaller the value of the multiplier - and vice versa
• The?greater the MPC, the greater the value of the multiplier - and vice versa
• Any change in one of the?factors?that impacts on?disposable income, will change the multiplier
  • If?taxes increase?the value of the?multiplier reduces
  • If?interest rates increase, savings increase and consumption decreases and the?multiplier reduces
  • If?exchange rates appreciate?the level of imports will increase and the?multiplier decreases
  • If?confidence in the economy?increases consumption increases and the?multiplier increases
• It is extremely useful for the?Government?to know the value of the?multiplier
  • They can use it to?judge the likely economic growth?caused by increased spending
• There is a time lag as it takes time for the successive rounds of income to work through the economy