The multiplier effect

multiplier effect financially shows that substantial infusion of cash into the economy multiplied in the course of their treatment in the state economy.Despite the fact that large foreign investment or government spending is a significant additional government revenue, which is equal to its initial value, it can be stimulated by other sectors of the economy.

Due to the initial investment is financing the cost of goods and direct wages, which leads to the creation of a significant number of jobs in the field of supplying, as it allows to increase the demand for goods and services in general.A shareholders and employees will benefit from this chain reaction, which was caused by the initial investment, the demand will continue to rise, wages rise, which has a positive impact on profit.The end result of all this will be a positive impact on the consumer market.It is likely that the strongest multiplier effects will show investment in construction.Usually they have a more powerful effect, affecting the entire economy in general.However, it may have experienced the bad and the multiplier effect when it shall be withdrawn from the significant amounts while significantly reducing government spending, for example, the abolition of a large project, which is associated with the development of infrastructure.In such circumstances, it receives a significant downturn in the economy.

multiplier theory

It is said that in general, a multiplier is the ratio of the changes to the income component of the change in autonomous expenditure.Its essence is that the national income increases with increasing any standalone component costs.The action of the multiplier in this case is as follows.For example, the initial level of investment in the construction of residential buildings, is a thousand dollars.All owners of the factors of production, which have been given the resources to organize the construction, will receive certain income.Part of their earnings builders to present in the form of demand for consumer goods market, while the second part is saved workers.It turns out that the other economic agents capita income increase.Part of this income other economic agents spend on consumer goods, the second part will go to savings.

This process captures gradually more and more segments of the population who file their income received and the consumer goods market in the form of demand.It turns out that the original thousand dollars will cause revenue growth and aggregate demand by an amount exceeding $ 1,000.The multiplier effect of its size depends on the propensity to consume and save.

In economic theory is accepted to allocate some kinds of multiplier:

- the multiplier of government spending;

- tax multiplier;

- the factor of foreign trade.

If the population continues to invest in the economy, they will be acquiring not only additional income, but also additional products presented in the domestic market.Increased investment in the domestic economy can significantly increase the number of jobs that solves the whole set of social problems.A negative effect is due to the high propensity of the population to save.In Russia, this situation is due to the fact that the population does not trust commercial entities, allowing to carry out the investment.That is why the need to stimulate investment activity at the state level, making it possible to achieve significant economic effect.