Investment multiplier. Investment multiplier and accelerator
In economic theory cartoonist– a category used to identify and collate relationships where a multiplying result occurs. Globally renowned academic economist J.M. Keynes, the author of macroeconomic theory, called cartoonist om indicator, the one that characterizes the connection between the metamorphosis of income and the metamorphosis of investments.
Instructions
1. According to Keynes's theory, any increase in investment sets in motion a multiplicative process, one that is expressed in an increase in the level of national income by a larger amount than the primary increase in investment. Keynes called this result the result cartoonist A. k ( cartoonist) = income of profits / income of investments. The strength of the result depends on the marginal inclination to save and consume cartoonist A. If the values of these indicators are tangentially continuous, then determine cartoonist won't be difficult.
3. From the fact that Y = C + I, the income income (Y) will be equal, respectively, to the sum of the consumption income (C) and the investment income (I).
4. According to the formula for the marginal propensity to consume: MPC = C / Y, we get: C = Y * MPC. Substitute this expression into the equation above (Y = C + I). We get: Y = Y * MPC + I. Consequently: Y * (1 – MRS) = I.
5. Further: income income Y = (1 / 1 – MPS) * investment income I, but since k = income Y / income I, therefore income Y = k * income I. This means that k = 1 / 1 – MPS = 1 / MPS, where k – cartoonist investments.
6. Thus, cartoonist investment is the reciprocal of the marginal propensity to save. The multiplier operates in both forward and reverse directions.
Tip 2: How to determine marginal propensity to consume
In the current economy, an indicator such as the marginal inclination To consumption. Its calculation is necessary to determine the country’s need for a particular product. Moreover, the magnitude of the metamorphosis of costs for goods, the amount of imports and exports, as well as the total volume of production must be known.
You will need
- - calculator;
- – the magnitude of the metamorphosis of total costs;
- – the magnitude of import metamorphosis;
- – the amount of government spending;
- - amount of investment;
- – the amount spent on production;
- – the value of the net national product.
Instructions
1. To calculate the marginal inclination to consumption total costs need to be determined. Add up the sum of the costs of consumption of a particular product, investment, government spending, and net exports. The latter value is found by subtracting the amount of imports from the amount of exports.
2. Determine the amount of net national product, the value of which must be in equilibrium, that is, total production equals total expenditures. As usual, this indicator can be calculated by summing up all costs.
3. Determine the value of the multiplier, which is calculated by dividing the deviation from the amount of the net national product (it is found by subtracting the total amount of metamorphosis from the NNP, which is calculated by subtracting the smaller indicator from the larger value) by the amount of the initial metamorphosis of total costs.
4. Limit inclination To consumption is determined further. From the value of the metamorphosis of total production costs, subtract the amount of deviation from the net national product indicator. Multiply the resulting total by the amount of increase (decrease) in NNP.
5. Limit inclination To consumption should be calculated in order to determine the tier of production. If total expenses are equal or approximately equal to the amount of money needed to purchase a certain volume of products, then the production tier is equilibrium.
6. Calculation of the maximum inclination to consumption production is needed to determine the consumed share of metamorphosis in total income. As usual, the value of the marginal inclination is less than one. If you know the indicator of the marginal inclination to save, then draw up a proportion from which it will be clear that the values are inversely proportional to each other.
The tax multiplier is a negative indicator, one that shows the metamorphosis of national income depending on the metamorphosis of taxes. An increase in taxes leads to a decrease in household income.
The essence of the tax multiplier
In economics there are so-called multiplier results. It appears in cases where the metamorphosis of costs leads to a greater change in equilibrium GDP. The Keynes multiplier is especially important. It reflects how much the level of profits increases as a result of the growth of government and other costs. The tax multiplier has less impact on reducing demand than the multiplier of government costs on its increase. It has a further result - when taxes increase, the gross national product decreases, and when taxes decrease, it grows. It is worth noting that between changes in the tax rate and national income there is always a time interval of several months to a year. The more powerful impact of government spending on domestic consumption is due to their direct entry into complex needs. How does the tax multiplier work? Thus, when taxes for the population are reduced, buyers are likely to spend more, and accordingly, they increase their spending on consumer goods. Reducing the tax burden for entrepreneurs stimulates the growth of investment. The influence of government spending and taxes on the amount of income and consumption is the main one when the state chooses fiscal (budgetary and tax) policy instruments. With priority expansion of the public sector of the economy, costs also increase. This leads to an increase in the income of the population, the production of goods, as well as a decrease in unemployment. However, such positive results are achieved only if the increase in government spending is caused not only by an increase in the tax burden. The greater power of government spending on moral consumption is due to the fact that they easily enter into a complex need and their metamorphoses are reflected in its value. If it is necessary to contain the inflationary rise, taxes increase. Today, fiscal policy is one of the main means of achieving sustainable progressive economic development. If government spending and taxes simultaneously increase by the same amount, then equilibrium production will also increase by the same amount. With a balanced budget, the multiplier is invariably equal to one.
Tax multiplier calculation
Changes in tax policy are traditionally likely to have a multidirectional impact on the economy. It is the tax multiplier that makes it possible to translate measures of influence into quantitative values. It is equal to the ratio of the marginal ability to consume to the marginal ability to save with a minus value. Let's say the value of the marginal ability to consume is 0.9, and to save - 0.3. Then the tax multiplier will be equal to -3. Accordingly, a $1 increase in taxes reduces national income by $3. Like the government spending multiplier, the tax multiplier can go both ways.
As paradoxical as it may seem, Russian animation is rightfully considered one of the best in the world; there are only a few animators in the country. At the same time, there are always a lot of people who want to get this interesting creative profession.
The initial stage of preparing an animator
Young people who dream of becoming an animator most likely imagine themselves in the future as production designers of animated films. However, this field of activity also involves another, fascinating, but caring job of creating countless images that make up a cartoon in the technical workshops of a film studio. Experts are trained to work in the workshops in only one educational institution in the Russian Federation. This is the Moscow highly professional artistic lyceum of animation cinematography No. 333. Admission to it is carried out on the basis of complete secondary education. However, it is not easy to get here from afar. To begin with, the applicant must submit at least 10 creative works to the competition, and after that pass exams in drawing, storyboarding and the Russian language. Over the course of 2 years of study, students learn both typical artistic disciplines (academic drawing, painting, etc.) and subjects directly related to the process of creating animation: for example, phasing and drawing. Upon graduation from the lyceum, graduates are awarded the qualification “cartoonist.” In addition to this unique educational institution, there are many professional lyceums where they are trained in the specialty “designer with computer graphics and animation skills.” It is also possible to enter there after finishing 11th grade, having successfully passed exams in drawing, painting and the Russian language. Of course, they don’t teach classical animation here, but many modern studios haven’t worked with shabby special technology for a long time. It is much more expensive than computer technology, and there are few real experts on it. So knowledge of modern computer technologies used to create animation is even more relevant.
The path to the top of the profession
Those who want to get closer to the top of the profession by creating personal animated films can continue their education at higher educational institutions. The basic university where animators are trained is the All-Union State University of Cinematography. True, it is very difficult to get there. The competition for it is enormous, and the selection is very severe. Applicants entering the specialty “animated film artist” or “computer graphics and animation artist” are first required to submit work to participate in an advance creative competition. After successfully passing it, they will have to pass exams in painting, drawing, composition, history, Russian language and literature. The subsequent fate of the animator depends greatly on his gift and hard work. If he manages to make truly brilliant, exciting, original animated films for children and adults, film studios will be happy to see him.
Video on the topic
Helpful advice
The investment multiplier reflects the correct impact of investment on other branches. J.M. With his theory, Keynes proposed, in addition to investment, to also regulate national income by increasing taxes in order to withdraw savings in order to increase state investment. The result of the multiplier can be caused not only by the inflow of investments, but also by other components of independent expenses (total costs). Then we talk about the total cost multiplier; it also works in the opposite direction.
When making investments, this is one of the main issues of economic analysis of an enterprise. Consumer income is divided into savings and means for consumption. The multiplier effect takes into account investment and consumer income and predicts a numerical increase in national profits.
Despite the fact that this coefficient was invented about 100 years ago, it is still popular when analyzing the activities of an enterprise. With its help, they predict not only the development of a single organization, but the economic development of entire states.
Meaning of the term
Multiplier is a term (from the Latin multiplicator - multiplying) that has many meanings. In the field of analysis of financial and economic activity, it denotes a coefficient reflecting the dependence of income growth on investments. It was introduced into economic theory in 1931 by the English economist R. Kahn.
A positive effect was shown in a public works enterprise. The experiment showed that with an increase in demand for certain services, the volume of work grew in all related industries and the number of employees increased significantly. What is the meaning of the multiplier in economics?
The cartoon effect has a chain reaction. The creation by the state of favorable conditions for the development and emergence of business by making certain investments will lead to new monetary investments in the country's economy.
The multiplier is an indicator that reflects how much the gross product will increase as the volume of invested funds increases. For example, investments increased by 10 million rubles, while the gross product increased by 30 million rubles. In this case, the multiplier is 3.
The multiplier grows when consumers use their financial resources to increase consumption, thereby generating increased demand. If the consumer shows a desire to accumulate earned funds, the multiplier decreases.
The multiplier effect works if it is possible to increase production capacity without the global costs of labor and production modernization.
Kinds
To analyze the financial activities of an enterprise, a set of parameters is used: various types of income and expenses, different classes of investments, as well as other cash flows. There was a need to divide the concept of “multiplier” into types, depending on these indicators.
This is how financial multipliers appeared. There are many types of multipliers adapted for different fields of activity; they can be divided into groups:
- money supply multipliers;
- investment spending multipliers;
- government spending multipliers;
- consumer spending multipliers;
- tax multipliers.
The significance of the multiplier effect implies the presence of various conditions, which is why such a variety of species arose. Let's look at the most common ones.
Expense multiplier
It exists in conjunction with the acceleration principle, which is calculated as the ratio of investments this year and national profits in the past. It helps to evaluate the results of what has been done and plan future development.
The spending multiplier is defined as the dependence of the national gross product on changes in spending. It is a numerical coefficient that reflects how the final result of an enterprise’s activities (income) depends on an increase or decrease in spent funds.
When calculating the expense multiplier, it is important to understand that all invested funds, on the one hand, are expenses, but on the other hand, they bring profit. The slightest reduction in investment, due to increased thriftiness of the population, will lead to a reverse multiplying effect and a decrease in income.
Net tax multiplier
This type and essence of the multiplier, like all previous ones, is related to the volume of product consumption. The numerical coefficient means how many times the total total expenditures exceeded the amount of net taxes.
Net taxes are funds paid by residents to the treasury, excluding transfer payments such as pensions. Accordingly, the value of the net tax multiplier is directly affected by transfer payments, because when they increase, the total amount of net taxes decreases.
To maintain the balance and stability of the economy while increasing taxation, it is also necessary to increase government transfer expenses. Do not forget that this can lead to economic stagnation.
Autonomous tax multiplier
In economic theory, there is a model that considers the option when the amount of income is not taken into account, in which case a multiplier of autonomous taxes arises.
Changes in household income depend on the amount of taxation and significantly affect the value of the multiplier. In addition, as income increases, its amount begins to be divided into consumption and savings, which also affects the multiplier effect.
It is worth noting that the net tax multiplier is less than the autonomous tax multiplier. This is due to the fact that a change in household income due to an increase or decrease in taxation leads to a change in consumption and demand.
Gross rent multiplier
This is a term used to evaluate real estate properties. Shows how the price at which an object is sold depends on the gross income from the sale. To evaluate real estate, the gross rental multiplier method is used. It includes the following steps:
- An analysis of the possible or actual gross income from the sale is carried out.
- You need to search for 3 or more similar properties and compare prices and potential (actual) gross income from the sale.
- Changes are made to the assessed value of your property.
- The gross multiplier for each object is calculated.
- The average multiplier among those received is calculated.
- The market value of your property is determined by multiplying the average multiplier by the calculated gross income from the sale.
How is it calculated?
The gross rental multiplier is an indicator that is calculated as the price for which the property is sold and the potential or actual gross income from the sale.
The coefficient, which determines the ratio of all funds invested in an enterprise and the organization’s assets, is most often used in the banking industry and depends on the bank’s ability to attract new funds in the form of deposits and issued loans.
The calculation is as follows: the amount of profit and interest expenses is divided by the assets of the enterprise, the resulting value is multiplied by 100. From the resulting amount, it is necessary to subtract the quotient of the funds raised and assets to capital.
Capital multiplier
He shows:
- how effective is the difference between the interest rates of loans issued and the rate on deposits placed with the bank?
- quality of deposited and issued cash flows;
- quality of work of own and borrowed capital.
The capital multiplier is a kind of indicator of the bank’s performance. Its meaning helps to make appropriate decisions to change the work of the organization.
Application in business valuation
For valuation work, a number of multipliers are used, taking into account different capital structures. The main species involved in the assessment are:
- The multipliers have arrived. Determined by dividing the price of a business by its revenue, profit before or after taxes, or dividends. The denominator depends on what multiplier effect you want to know.
- Balance sheet multiplier. It is calculated by dividing the real price of the business by the value of assets, according to the balance sheet.
- Natural animator.
All these multipliers can be called estimated. They show the relationship between the real market price of an organization and its financial base.
Economics is a science present in all spheres of society. The ability to use its laws will improve the quality of life and predict possible difficulties. The development of the country's economy directly depends on investment. Creating favorable market conditions will lead to increased investment and, as a result, increased GNP.
The amount of money supply is always influenced by several factors. First, this is the behavior of firms operating in the non-banking and household sectors. Secondly, commercial banks, which have the opportunity to use credit funds incompletely, that is, without issuing them in the form of loans, but keeping the resulting excess reserves for themselves. In this case, changes in deposit volumes will be accompanied by a multiplier effect. Let's try to calculate the money multiplier.
Basic Concepts
In order to understand what the essence of the concept of “money multiplier” is, you need to have an understanding of two norms: reservation and deposit.
The reserve ratio shows the ratio of the volume of reserves to the share of deposits kept in the bank as reserve amounts, or the amount of deposits:
The deposit rate is defined as the ratio of cash to deposits:
It shows what the population is more inclined to do: keep their savings in cash or on deposits.
It follows that the money multiplier, or, as economists call it, the monetary base multiplier, is a coefficient indicating how many times the volume of money will be increased (reduced) when the supply of money increases (reduces) by one unit.
Like any economic multiplier, the monetary multiplier can also work in both directions. If the country's Central Bank plans to increase monetary volumes, then it will increase the monetary base, otherwise it will decrease it.
The money supply multiplier depends on the norms described above. If the deposit rate increases, then, accordingly, the multiplier decreases. On the other hand, an increase in the reserve ratio (that is, an increase in the share of deposits in the bank in the form of reserves) reduces the value of the multiplier.
In theory
Economic theory determines that the money multiplier is equal to the reciprocal rate of reserves of commercial credit institutions for mandatory storage in the Central Bank. In practice, it is calculated as the quotient of the monetary aggregate M2 to the monetary base. It is necessary to study the dynamics of the monetary base multiplier to control the money supply and inflation processes in the country. It is the money multiplier that is able to show the possible growth of the money supply without negative consequences in the form of rising consumer prices and inflation. The formula for calculating the money multiplier is simple; it is always greater than one.
Practically
You can derive an expression for calculating the multiplier using the reservation rate: rr = R / D and the deposit rate: cr = C / D.
Since C = cr x D, and R = rr x D, we obtain the equalities:
M = C + D = cr x D + D = (cr + 1) x D
H = C + R = cr x D + rr x D = (cr + rr) x D.
Now let's divide the first equality by the second:
M / N = ((cr + 1) x D (cr + 1)) / (cr + rr) x D (cr + rr) = (cr + 1) / (cr + rr)
We get the equality: M = ((cr + 1) / (cr + rr)) x H,
M = mult den x H mult den = (cr + 1) / (cr + rr).
The money multiplier is the expression (cr + 1) / (cr + rr).
If we assume that C = 0 (that is, there is no cash), and the money supply rotates without leaving the banking system, the multiplier turns into the banking multiplier: mult D = 1 / rr. This may be why the bank multiplier is called the simple money multiplier.
The essence of the money multiplier
It consists of a mechanism for increasing monetary volumes due to deposits opened by clients in banks, which takes place in the process of movement of non-cash funds through the system of non-state banks.
This mechanism is created subject to the presence of a banking system of two levels. In this case, the emission process takes place between the Central Bank (issuance of cash volumes) and the system of commercial banks (issuance of non-cash funds).
The increase in the volume of money supply in interbank circulation (the process of monetary multiplication) occurs due to the issuance by banks in the form of loans attracted to the deposit accounts of their clients’ funds, which they use in carrying out various payments and settlement transactions. On the other hand, clients of borrowing banks can open deposits with third-party banks. Consequently, the total volume of deposits throughout the banking system almost always exceeds the amount of the deposit initially created.
The principle of animation
Each country has its own characteristics in distribution banking mechanisms. For example, in states with a command-distribution economy, emissions are carried out according to a directive issued from above. In countries with a conventional market mechanism, the banking system operates at two levels: the Central Bank and a layer of commercial banks. Therefore, the issue under such a system has a credit multiplier.
By competently managing this mechanism, the Central Bank has the opportunity to expand or narrow the issuing processes of the entire institution of commercial banks. Economic theory makes it clear that the coefficient of growth (decrease) in total production per increase in the mass of money (more precisely, its unit) is the multiplier. This value shows how many times the supply can change (increase or decrease) after an increase or decrease in the volume of deposits in the financial and credit sector.
The monetary base is nothing more than reserves required to be paid by commercial banks and cash in circulation among the population outside the control of the Central Bank. Considering the money multiplier coefficient in the described aspects, we can derive the formula:
M = (1 + c) / (r + e + c).
Here, “c” refers to the ratio of cash to all deposits in the country’s banking system, “r” characterizes mandatory reserves, and “e” shows the ratio of free bank reserves to deposits.
Indicator value
The Central Bank regulates the mechanism for increasing (decreasing) the volume of money through mandatory reserve savings from each commercial bank. The value of the money multiplier does not stand still. It varies not only in space and time, but also from country to country. In countries with developed economies, this value can exceed the value of the first emission by more than twice.
We derive the formula
The money multiplier (the formula is described below) is easy to calculate:
m = Money supply / Monetary base = M / B.
The process of regulation by the Central Bank of the value of the money multiplier (k) entails the emergence of the concept of the monetary base. It is based on the very deposits of commercial banks that the Central Bank holds, and the most liquid money is cash.
Monetary base = M 0 + money supply of required reserves (CB) + money supply in correspondent accounts in the Central Bank of a network of commercial financial institutions.
The money supply shows the amount of money that the country’s Central Bank can operate:
Money supply = base. cartoonist
Based on this formula, we can determine the money multiplier: this is the ratio of the money supply (M2) to the monetary base.
An inversely proportional relationship exists between the volume of required reserves from commercial institutions of the financial and credit sector in the accounts of the Central Bank and the value of the money multiplier. And if the money multiplier decreases, the required reserve ratio pledged by commercial banks becomes higher. If the money multiplier grows, then non-cash turnover subsequently increases (compared to cash), because the growth of the monetary base multiplier is directly related to the growth of the cash supply and balances on correspondent accounts with the Central Bank.
Money multiplier relationship
As already written, the size of the money multiplier depends on the reserve and deposit rates. The higher they are, the larger volumes of reserves are kept untouched. The higher the share of cash in the masses, which the population is in no hurry to invest in deposits, the lower the value of the multiplier. This is clearly visible on the graph.
It reflects the relationship between the monetary base (H) through the monetary amount (M) and the multiplier, which is equal to (cr + 1) / (cr + rr). This shows that the tangent of the angle of inclination is equal to the ratio (cr + rr) / (cr + 1).
If H 1 (the value of the monetary base) does not change, then the deposit rate, as it grows from r 1 to cr 2, reduces the money multiplier number and at the same time increases the slope of the curve reflecting the money supply (or money supply). As a consequence, this very sentence is reduced from M 1 to M 2. If it is necessary that the money supply (or supply) does not change when the value of the money multiplier decreases, but remains in a stable state at the level of M 1, the Central Bank must increase the monetary base to H 2.
From the above it is clear: an increase in the deposit rate reduces the value of the money multiplier. On the other hand, one can see an increase in the reserve ratio (an increase in the share of deposits held in the form of reserve reserves). That is, as excess bank reserves (not issued as loans to customers) increase, the value of the money multiplier decreases.
Monetary multiplier
This is an economic coefficient that characterizes the increase (or decrease) in excess bank reserves. It is formed as a result of the creation of new deposits (non-cash money). They appear in the process of issuing loans to clients from additional free reserves received by the bank from outside.
From this it becomes clear: credit resources that left one commercial bank in the form of issued loans become the property of another bank. And he, in turn, provides his clients with this money, only in non-cash form. That is, a monetary unit issued by one commercial financial institution creates credit reserves for another bank.
Reserve norms of commercial banks
The bank's ability to create reserves in excess form is limited by the function of forming required reserves by the structure of commercial banks. Their volumes are determined by the reserve norm, the regulations of which are determined by law. The Central Bank calculates them as a percentage of bank liabilities. These reserves help the country's banking system provide liquidity during unfavorable periods and regulate the money supply in circulation:
M = 1/Рн, where Рн is the reserve rate.
- MM is the monetary multiplier for a given time period;
- M 0 - money supply outside banking circulation;
- D - monetary volumes stored on deposits of commercial banks;
- R - reserves of commercial banks stored in correspondent accounts and cash desks.
A stable equilibrium in the money market can shake the elevated money multiplier. And even provoke inflation.
What does the bank multiplier depend on?
The value of the monetary multiplier depends on the following factors:
- norms of required reserves of commercial banks;
- a decrease in demand for loans among the population and business and a simultaneous increase in borrowed interest, which usually entails a decrease in the issuance of loans and a decrease in the volume of deposits;
- the use by clients of funds borrowed from banks for third-party cash payment transactions, which causes a suspension of the multiplication process and reduces its value;
- An increase in cash receipts to client accounts or the sale of a share of assets on the interbank transactions market usually creates conditions for an increase in the multiplier coefficient.
The investment multiplier in investment theory appeared thanks to the American economist John Keynes, which is why it is often called the Keynes multiplier.
In economic literature, Keynes was the first to substantiate the dependence of investments and the income received from them by a factor of k, with a coefficient called the multiplier. At the same time, changes in investment cause significantly more significant changes in employment and income in the economy.
Keynes called his multiplier the accumulation multiplier and established the dependence of national income on investment in the economy.
This relationship looks like this for Keynes:
Keynes's investment multiplier, according to him, depends on the propensity of the country's population and state to consume.
If we denote consumption as C and the propensity to consume as A, then Keynes defined the relationship between the multiplier and national income and investment in the economy as:
A small increase in investment, as well as a decrease in investment, causes significant changes in the growth or fall of national income.
Primary investments have a chain reaction effect and cause increased consumption, higher wages and new investments in areas of production responsible for meeting new demand. This results in a disproportionate increase in national income.
At its core, primary investments serve as a trigger for the investment process in the economy. And the propensity to consume depends on the economic situation in the country.
In the case of normal functioning of the economy, the propensity to consume is more pronounced than in periods of crisis. Therefore, during periods of crisis, the propensity to save increases, as a result of which investment growth decreases, and crisis phenomena intensify, leading to a disproportionate decrease in the country’s national income.
Example of a multiplier action
Let's consider an example of the effect of the multiplier on the housing construction industry, where the construction of new housing causes new investments in related industries and increases the growth of consumption in industries that provide households with everything necessary for the livelihoods of the population.
For example, let's build an individual house for 50 million rubles. This includes the cost of construction materials and labor costs. This is the primary investment. The funds spent are distributed in accordance with the existing structure of consumption and savings: 70% for consumption, 30% for. Accordingly, all construction participants will spend 35 million on purchasing necessary goods, and will save 15 million rubles. Further, manufacturers of consumer goods will receive 35 million rubles of income, of which they will spend 24.5 million rubles on consumption and save 10.5 million rubles. In the next cycle, the income received of 24.5 million rubles will be distributed in the same way between consumption and savings. Ultimately, the total income received from an investment of 50 million rubles will be 150 million rubles. In other words, an increase in investment of 50 million rubles caused an increase in income of 150 million rubles. Accordingly, k = 150 / 50 = 3.
In the construction industry, the multiplier is usually higher than in other industries, and this indicates the importance of this industry and the need to invest in its development.
The quantitative relationship between investment and national income is described using a multiplier. Multiplier means multiplier. It shows the magnitude of changes in income as a function of changes in investment.
For the first time, the term multiplier was used to assess the relationship between the growth of public works costs and the rapid growth of labor force employment.
Keynes expanded the concept of the multiplier to the macroeconomic level. His multiplier shows the relationship between general, public and private investment and national income.
The snowball effect (or multiplier effect) shows how much an increment of 1 unit of investment increases income. Let's assume that the government allocated $1 billion for public works to build roads, bridges, etc. After their implementation, 1 billion turned into household income. The marginal propensity to consume in society MPC = 0.8. Let us determine the overall increase in ND associated with the multiplier effect. Out of $1 billion, households allocate $800 million for consumption, which will be spent on purchasing consumer goods from other economic entities. Thus, they will receive an income of 800 million, which in turn will be divided into 640 million of the consumed part and 160 million of the saved part. The third group of economic entities will have an income of 640 million, which will be distributed for consumption: 640 * 0.2 and savings: 640 * 0.8.
In general, an increase in investment of $1 billion gives, at a given level of MPC, an increase in income equal to five. This increase can be calculated as the limit of a decreasing geometric progression.
1(1+0.8 1 +0.8 2 +0.8 3 +…+0.8 n).
The multiplier is calculated using the formula:
Thus, the multiplier is directly proportional to the marginal propensity to consume and inversely proportional to the marginal propensity to save.
The animator is characterized by 3 features:
1. An increase in investment leads to a dampening expansion of income. This follows from the decaying nature of the geometric progression. The animation effect stops when . Actual calculations show that the multiplier factor ranges from 2.5 to 3.
2. The multiplier effect depends on the directions of investment of new investments. Keynes believed that practice confirms: new investments should be made in industries not related to the production of consumer goods, i.e. he recommended investing in the production of public goods. If investments are directed into the production of consumer goods, then in a depression this will increase the marketable mass of consumer goods. Overstocking will not only not decrease, but will also increase.
3. The multiplier effect can be both positive and negative.
It depends on the stage of the cycle. During periods of decline in production and decline in investment, income income falls at a faster rate than the investment decline. Positive multiplication occurs during periods of economic recovery, and government investment is also positive.
The animation is actively influenced by the tax policy of the state. Increasing taxes cuts off the multiplier effect. A condition for animation is also the presence of free labor and production capacity in society.
The acceleration effect (accelerator) is associated with the animation effect. Its essence is as follows: an increase in investment leads to an increase in income. The growth of ND increases consumer demand for goods and services, and consumer demand for goods and services leads to a new surge in demand for investment. In order for the accelerator multiplier to work in Russia, it is necessary to increase the effective demand of the population, and this involves investment in industries producing consumer goods and services.