multiplier

/mul"teuh pluy'euhr/, n.

1. a person or thing that multiplies.

2. Arith. a number by which another is multiplied.

3. Physics. a device for intensifying some effect.

[1425-75; late ME; see MULTIPLY, -ER¹]

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In economics, a numerical coefficient showing the effect of a change in one economic variable on another.

One macroeconomic multiplier, the autonomous expenditures multiplier, relates the impact of a change in total national investment on the nation's total income; it equals the ratio of the change in total income to the change in investment. If, for example, the total investment in an economy is increased by $1 million, a chain reaction of increases in consumption is set off. Producers of raw materials used in the investment projects and workers employed in the projects gain $1 million in income. If they spend on average three-fifths of that income, $600,000 will be added to the incomes of others. The makers of the goods they buy will in turn spend three-fifths of their new income on consumption. The process continues such that the amount by which total income increases may be computed by an algebraic formula. In this case, the multiplier equals 1/(1/n-/n3/5), or 2.5. This means that a $1 million increase in investment creates a $2.5 million increase in total income. Other multipliers include the money multiplier, which measures money creation resulting from a change in monetary policy; the government spending multiplier, which measures the change in national income resulting from changes in fiscal policy; and the tax multiplier, which measures the changes in national income resulting from a change in taxes. The concept of the multiplier process was popularized in the 1930s by John Maynard Keynes as a means of measuring the effect of government spending.

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▪ finance

      in economics, numerical coefficient showing the effect of a change in total national investment on the amount of total national income (national income accounting). It equals the ratio of the change in total income to the change in investment.

      For example, a $1 million increase in the total amount of investment in an economy will set off a chain reaction of increases in expenditures. Those who produce the goods and services that are ultimately purchased as a result of the $1 million influx will realize the $1 million as increases in their incomes. If they, in turn, collectively spend about ³/₅ of that additional income, then a total of $600,000 will be added to the incomes of others. At this point in the process, total income will have been raised by (1 × $1,000,000) + (³/₅ × $1,000,000), or the amount of the initial expenditure on investment plus the additional expenditure on consumption.

      The sum will continue to increase as the producers of the additional goods and services realize an increase in their incomes, of which they in turn spend ³/₅ on even more goods and services. The increase in total income will then be (1 × $1,000,000) + (³/₅ × $1,000,000) + (³/₅ × ³/₅ × $1,000,000).

      The process can continue indefinitely. The amount by which total income will increase can be computed through an algebraic formula for such progressions. In this case it equals 1/ (1 - ³/₅), or 2.5. This means that a $1 million increase in investment has effected a $2.5 million increase in total income.The multiplier analysis assumes that either the money supply or the velocity of money will increase to allow the extra spending to occur.

      The concept of the multiplier process became important in the 1930s when the British economist John Maynard Keynes (Keynes, John Maynard) suggested it as a means to achieving full employment. This approach, meant to help overcome a shortage of private investment, measured the amount of government spending needed to reach a level of income that would prevent unemployment. The concept has since been applied to the cumulative effect of changes in many other variables of total income, such as changes in imports.

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