What is the Investment Multiplier
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What is the investment multiplier?
what are some factors that may cause the level of autonomous investment to rise?
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by ekonomix Member since: 29 June 2006 Total points: 8,642 (Level 5)
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Investment multiplier is simply the multiplier effect of an injection of investment into an economy. In general, a multiplier shows how a sum injected into an economy travels and generates more output. For example if you buy $100 worth of chips. Say the stallowner saves $10 and spends $90 on burgers. Then the burger stall owner saves 10% that is $9 and consumes the rest ($81) on cheese, and so on... Each $ receivedm 10% is saved (marginal propensity to save- MPS) and 90% consumed (marginal propensity to consume - MPC). This eventually results in 100/(1-.9)=$1000 worth of expenditure in the economy. The multiplier=1/(1-MPC). The investment multiplier is simply teh same idea applied to an increase in investment as opposed to consumption above. Using consumptionjust makes it easier to understand; investment multiplier is just the same. Now, autonomous investment increases for many reasons. People might start believing that better times are ahead, hence prepare for the future. Another could be that more people decide to become entrepreneurs. Another could be government policies that make small loans available for SMEs. Another could be peace rather than war. ANother could be change in tarde reginme towards an open economy so people try to invext to export... hope that helped.
Source(s):
http://www.auburn.edu/~garriro/multinv.h…
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by Ronnie @ BinBrain.Com Member since: 18 January 2008 Total points: 9,589 (Level 5)
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In economics, the multiplier effect refers to the idea that an initial spending rise can lead to even greater increase in national income. In other words, an initial change in aggregate demand can cause a further change in aggregate output for the economy For example: a company spends $1 million to build a factory. The money does not disappear, but rather becomes wages to builders, revenue to suppliers etc. The builders will have higher disposable income as a result, so consumption, hence aggregate demand will rise as well. Say that all of these workers combined spend $2 million dollars in total, since there was an initial $1 million input which created a $2 million output, the multiplier is 2. Another example is when a tourist visits somewhere they need to buy the plane ticket, catch a taxi from the airport to the hotel, book in at the hotel, eat at the restaurant and go to the movies or tourist destination. The taxi driver needs petrol for his cab, the hotel needs to hire the staff, the restaurant needs attendants and chefs, and the movies and tourist destinations need staff and cleaners. It must be noted that the extent of the multiplier effect is dependent upon the marginal propensity to consume and marginal propensity to import. Also that the multiplier can work in reverse as well, so an initial fall in spending can trigger further falls in aggregate output. The basic formula for the economic multiplier, in macroeconomics, the change in equilibrium GDP divided by the change in investment (i.e. the initial increase in spending). It is particularly associated with Keynesian economics; some other schools of economic thought reject, or downplay the importance of multiplier effects, particularly in the long run. The multiplier has been used as an argument for government spending or taxation relief to stimulate aggregate demand. The reader should know that "Keynesian economics" is something quite different from the "economics of Keynes". Thus the "other" schools that reject the multiplier effects are those associated with the "economics of Keynes". This school sees the so-called "multiplier effect" as being a variant of the "broken window fallacy" While there may indeed be some small short run impact on unemployed resources from an "initial" cash infusion due to "money illusions", by definition, when inputs are fully employed, by definition, there is no socially useful purpose served by this infusion, other than to fool people into working harder than they wish, for the returns they receive by "working".
The concept of the economic multiplier on a macroeconomic scale can be extended to any economic region. For example, building a new factory may lead to new employment for locals, which may have knock-on economic effects for the city or region.
what are some factors that may cause the level of autonomous investment to rise?
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5 years ago Report Abuse
by ekonomix Member since: 29 June 2006 Total points: 8,642 (Level 5)
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Best Answer - Chosen by Voters
Investment multiplier is simply the multiplier effect of an injection of investment into an economy. In general, a multiplier shows how a sum injected into an economy travels and generates more output. For example if you buy $100 worth of chips. Say the stallowner saves $10 and spends $90 on burgers. Then the burger stall owner saves 10% that is $9 and consumes the rest ($81) on cheese, and so on... Each $ receivedm 10% is saved (marginal propensity to save- MPS) and 90% consumed (marginal propensity to consume - MPC). This eventually results in 100/(1-.9)=$1000 worth of expenditure in the economy. The multiplier=1/(1-MPC). The investment multiplier is simply teh same idea applied to an increase in investment as opposed to consumption above. Using consumptionjust makes it easier to understand; investment multiplier is just the same. Now, autonomous investment increases for many reasons. People might start believing that better times are ahead, hence prepare for the future. Another could be that more people decide to become entrepreneurs. Another could be government policies that make small loans available for SMEs. Another could be peace rather than war. ANother could be change in tarde reginme towards an open economy so people try to invext to export... hope that helped.
Source(s):
http://www.auburn.edu/~garriro/multinv.h…
•
5 years ago
100% 1 Vote
•
•
0 Rating: Good Answer o Agree (0) o Useful (0) 0 Rating: Bad Answer o Factually Incorrect (0) o Incomplete (0) o Irrelevant (0)
Not the right answer? Try Yahoo!7 Search
Search Yahoo!7 for Search
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Other Answers (1)
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by Ronnie @ BinBrain.Com Member since: 18 January 2008 Total points: 9,589 (Level 5)
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In economics, the multiplier effect refers to the idea that an initial spending rise can lead to even greater increase in national income. In other words, an initial change in aggregate demand can cause a further change in aggregate output for the economy For example: a company spends $1 million to build a factory. The money does not disappear, but rather becomes wages to builders, revenue to suppliers etc. The builders will have higher disposable income as a result, so consumption, hence aggregate demand will rise as well. Say that all of these workers combined spend $2 million dollars in total, since there was an initial $1 million input which created a $2 million output, the multiplier is 2. Another example is when a tourist visits somewhere they need to buy the plane ticket, catch a taxi from the airport to the hotel, book in at the hotel, eat at the restaurant and go to the movies or tourist destination. The taxi driver needs petrol for his cab, the hotel needs to hire the staff, the restaurant needs attendants and chefs, and the movies and tourist destinations need staff and cleaners. It must be noted that the extent of the multiplier effect is dependent upon the marginal propensity to consume and marginal propensity to import. Also that the multiplier can work in reverse as well, so an initial fall in spending can trigger further falls in aggregate output. The basic formula for the economic multiplier, in macroeconomics, the change in equilibrium GDP divided by the change in investment (i.e. the initial increase in spending). It is particularly associated with Keynesian economics; some other schools of economic thought reject, or downplay the importance of multiplier effects, particularly in the long run. The multiplier has been used as an argument for government spending or taxation relief to stimulate aggregate demand. The reader should know that "Keynesian economics" is something quite different from the "economics of Keynes". Thus the "other" schools that reject the multiplier effects are those associated with the "economics of Keynes". This school sees the so-called "multiplier effect" as being a variant of the "broken window fallacy" While there may indeed be some small short run impact on unemployed resources from an "initial" cash infusion due to "money illusions", by definition, when inputs are fully employed, by definition, there is no socially useful purpose served by this infusion, other than to fool people into working harder than they wish, for the returns they receive by "working".
The concept of the economic multiplier on a macroeconomic scale can be extended to any economic region. For example, building a new factory may lead to new employment for locals, which may have knock-on economic effects for the city or region.
