Question

Define what the multiplier is AND explain how and why it works.

Explain two argument against

Robert Gordon’s claim that wage stagnation is due to the exhaustion of technological

progress.

Answer 1

Soln. Multiplier effect - Multiplier effect is defined as increase in overall spending results in increase in national income, which is greater than initial amount.It is referred as net and final income resulting from increase in spending.

How and why it works - The amount of multiplier depends on the household's decision to spend and save. Multiplier effect can be used in any economic processes, when there is injection of new spending. Examples are - Government funding for building new bridge, reduction in tax rates, etc. In, all these case, there is change in overall spending and hence, there would be change in the national income. That change in national income would be calculated by multiplier effect.

Formula of multiplier effect uses marginal propensity to consume (mpc), which is defined as individual's or household's decision to spend, to get the value as - multiplier effect = 1/[1 - mpc].

Two arguments against Robert Gordon’s claim that wage stagnation is due to the exhaustion of technological progress-

1. There is no significant involvement of IT system and its impact on productivity

2. Only one of Gordon’s six “headwinds” has ability to negatively impact the productivity. This does not seems practical as there are instances where other five “headwinds”, also impact the productivity.