Multiplier effect: Difference between revisions
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The '''multiplier effect''' is the effect of an injection of income into an economy upon the total income of that economy, which is a definitional consequence<ref> As is demonstrated in the article on the [[spending multiplier]]</ref> of the [[Macroeconomics#The circular flow of income|circular flow of income]] model of the economy. The effect is to raise the total income of the economy by a multiple of the initial injection. and its magnitude is limited by income "leakages" (into, for example, taxation or spending on imports). If the recipients of the increases in income would otherwise be unemployed, the effect takes the form of an increase in the level of activity in the economy: if they would otherwise be fully employed, it takes the form of an increase in the general level of prices. | The '''multiplier effect''' is the effect of an injection of income into an economy upon the total income of that economy, which is a definitional consequence<ref> As is demonstrated in the article on the [[spending multiplier]]</ref> of the [[Macroeconomics#The circular flow of income|circular flow of income]] model of the economy. The effect is to raise the total income of the economy by a multiple of the initial injection. and its magnitude is limited by income "leakages" (into, for example, taxation or spending on imports). If the recipients of the increases in income would otherwise be unemployed, the effect takes the form of an increase in the level of activity in the economy: if they would otherwise be fully employed, it takes the form of an increase in the general level of prices. | ||
Simple multiplier models embody the implicit assumption that income leakages are a fixed proportion of the initial injection, and that the multiplier is consequently invariable. They assume, for example, that a community's [[marginal propensity to save]] is a behavioural constant. More sophisticated models take account of the effect upon behaviour of the perceived permanence or otherwise of the income injection. | |||
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The multiplier effect is often referred to as a measure of the effect of [[fiscal policy]] upon the level of economic activity. In that context, Robert Barro has argued that the multiplier is zero because any change in government spending will prompt taxpayers to save an equivalent amount in anticipation of a subsequent tax increase<ref>Robert J. Barro: ''Reflections on Ricardian Equivalence'', National Bureau of Economic Research Working Paper No. w5502, March 1996</ref>. Others have argued that interest rate increases caused by government spending cause an offsetting "crowding out" of private sector investment | The multiplier effect is often referred to as a measure of the effect of [[fiscal policy]] upon the level of economic activity. In that context, Robert Barro has argued that the multiplier is zero because any change in government spending will prompt taxpayers to save an equivalent amount in anticipation of a subsequent tax increase<ref>Robert J. Barro: ''Reflections on Ricardian Equivalence'', National Bureau of Economic Research Working Paper No. w5502, March 1996</ref>. Others have argued that interest rate increases caused by government spending cause an offsetting "crowding out" of private sector investment | ||
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Estimates of its magnitude are made either by [[regression analysis]] of past data or by fitting past data into an [[economic model]]. Since its value may be expected to vary due to variations in the factors that influence the accuracy of current estimates may be limited by the intrusion of unanticipated factors. | Estimates of its magnitude are made either by [[regression analysis]] of past data or by fitting past data into an [[economic model]]. Since its value may be expected to vary due to variations in the factors that influence the accuracy of current estimates may be limited by the intrusion of unanticipated factors | ||
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Revision as of 16:56, 2 November 2012
The multiplier effect is the effect of an injection of income into an economy upon the total income of that economy, which is a definitional consequence[1] of the circular flow of income model of the economy. The effect is to raise the total income of the economy by a multiple of the initial injection. and its magnitude is limited by income "leakages" (into, for example, taxation or spending on imports). If the recipients of the increases in income would otherwise be unemployed, the effect takes the form of an increase in the level of activity in the economy: if they would otherwise be fully employed, it takes the form of an increase in the general level of prices.
Simple multiplier models embody the implicit assumption that income leakages are a fixed proportion of the initial injection, and that the multiplier is consequently invariable. They assume, for example, that a community's marginal propensity to save is a behavioural constant. More sophisticated models take account of the effect upon behaviour of the perceived permanence or otherwise of the income injection.
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- ↑ As is demonstrated in the article on the spending multiplier
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