De-Jargonize

MULTIPLIER: A multiplier summarizes the total impact that can be expected from change in a given economic activity.

K =ΔY/ΔI

It is an initial change in aggregate demand that can have a much greater final impact on national income. This is known as the Multiplier effect.

The working of multiplier tells us as to what will be the final change in income as a result of change in investment. Change in investment causes a change in income. And as a result of change in income there is change in consumption which in turns leads to a multiply of change in income. Here I- Investment, Y- Income, C- Consumption.

ΔI →ΔY→ΔC→ΔY….

 

It comes because of injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending as one person’s spending is other person’s income. This in turn leads to a bigger effect on output and employment.

1.      Injections: Injections are non-consumption expenditureon aggregate production. The three injections are investment government purchases and exports. These are termed as injections because they are "injected" into the circular flow of consumption, production, and income.

2.      Leakages: A leakage is the diversion of income from the flow of domestic spending. The three leakages are saving, taxes, and imports. These are termed as leakages because they are "leaked" out of the circular flow of consumption, production, and income.

3.      Balanced budget multiplier: It is the measure of the change in aggregate production caused by equal changes in government purchases and taxes. This multiplier is the combination of expenditure multiplier and tax multiplier.

Expenditure multiplier measures the change in aggregate production caused by changes in an autonomous expenditure.

The tax expenditure measures the change in aggregate production caused by changes in taxes.

4.      Planned Expenditure: This is the total amount the economy plans to spend in a given period. It is announced beforehand about the amount of activity which is going to happen. Example: Defense which is largely financed through loans.

5.      Non Plan Expenditure: All the expenditure incurred in connection with maintaining normal services is called non-plan expenditure. It is the residual after the planned expenditure.

Contributed by:

Tanvi Lal
Section A, Economics

Batch 2013-15