8. Multiplier and Accelerator

7/28/2019 8. Multiplier and Accelerator

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Multiplier and acceleratorChapter 44


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Multiplier

As investment is done, how much or how manytimes income increases, this can be known fromthe concept of multiplier.

As investment is increased, the national incomeincreases proportionately much more. How many

times it increases depends on the marginalpropensity to consume.

The higher the marginal propensity to consume,the greater will be the increase in income as aresult of investment. The higher the marginal

propensity to consume, the bigger will be themultiplier.

Multiplier is the ratio of the change in nationalincome to the change in Investment.


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Kahns Employment multiplier

It is also known as Kahns multiplier.

When government undertakes public works

like roads, railways, irrigation works then

people get employment. This is initial orprimary employment.

These people then spend their income on

consumption goods. As a result, demand for

consumption goods increases, which leadsto increase in the output of concerned

industries which provides further

employment to more people.


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Kahns Employment multiplier

The process does not end here. Theentrepreneurs and workers in such

industries, in which investment has been

made, also spend their newly obtained

income which results in increasing output

and employment opportunities.

In this way, we see that the total

employment so generated is many timesmore than the primary employment.


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Keynes Income or Investment

Multiplier It shows that a given increase in investment

ultimately creates total income which is

many times the initial increase in income

resulting from that investment.

Income multiplier indicates, how many

times the total income increases by a given

initial investment. It is the ratio of the

change in income to the change ininvestment.

K= Y

I


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Limitations of Multiplier

Efficiency of production: If the productionsystem of the country cannot cope with

increased demand for consumption goods

and make them readily available, the

incomes generated will not be spend. As a

result, marginal propensity to consume may

decline.

Regular investment: The value of themultiplier will also depend on regularly

repeated investments. A steadily increasing

investment is essential if the multiplier effect

is not to be lost.


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Limitations of Multiplier

Full employment Ceiling:As soon as fullemployment of the idle resources is

achieved, further beneficial effect of the

multiplier will be ceased.


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Accelerator

Accelerator shows the effect of increase inincome on the resultant investment.

When income increases, peoples spending

power increases; their consumptionincreases and consequently demand for

consumer goods increases.

In order to meet this enhanced demand,

investment must be increased to raise theproductive capacity of the community.


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Accelerator

Initially, the increased demand will be metby over working the existing plants and

machineries. All this leads to increase in

profits which will induce entrepreneurs to

expand their plants by increasing

investment.

Thus, a rise in income leads to a further

increase in investment. So, accelerator is the numerical value of the

relation between an increase in income and

the resulting increase in investment.

8. Multiplier and Accelerator

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