In: Economics
What is the investment multiplier and how does it work on the spending in an economy?
Investment Multiplier has an important place in current income
and employment theory.
The concept of multiplier was first coined by FAC in the early
1930s. But then Quinn improved it even further. FA Kahn developed
the concept of coefficients for direct and indirect job growth,
resulting in an initial increase in investment and
employment.
However, Keynes disseminated the concept of coefficients regarding
direct and indirect total revenue growth as a result of initial
increases in investment and earnings.
So while the Keynes factor is known as the 'job factor', the Keynes
coefficient is known as the investment or earnings multiplier. The
essence of the multiplier is that an increase in income, output, or
employment is the first increase in investment. For example, if the
investment is equal to Rs. 100 billion is made then revenue will
not increase from Rs. 100 times more often.
If as a result of the investment of Rs. 100kg National income
increases by Rs. 300 billion times 3. If as a result of the
investment of Rs. 100k, total national income increases by Rs. 400
billion times 4. So the coefficient is the ratio of income growth
and investment growth. If stance I means an increase in investment,
and means Y means a continuous increase in income, then the
coefficient is equal to the ratio of the increase in income (∆K) to
the increase in investment (∆I)