MULTIPLIER AND ACCELERATOR

MULTIPLIER AND ACCELERATOR

CONCEPT OF MULTIPLIER

                 We have studied the determination of income and employment in a country. There we saw that the volume of employment depends on aggregate demand. The aggregate demand is composed of

(a) Consumption demand

(b) Investment demand. Consumption demands on the consumer’s income and his propensity to consume and investment demand on

(a) The marginal efficiency of capital

(b) The rate of interest

            Higher the propensity to consume the higher will be the level of income and employment in a country. Hence, if there is unemployment in a country, steps should be taken to raise the propensity to consume, when investment is increased then also the level of income and employment rises. As income increases, consumption expenditure too increase, but proportionately less than the increase in income. This is due to the fact that the marginal propensity to consume is less than unity.

            In this topic we discuss, propose to study how much or how many times income increases as investment is done. This can be known from the concept of the multiplier. We shall see that as investment is increases proportionately much more. How many times it increases depends on the marginal propensity to consume. As we have said already, the higher the marginal propensity to consume, the greater will be the increase in income as a result of investment. The higher the marginal propensity to consume the bigger will be the multiplier. We shall explain this fully presently.

        Since the national income increase many items more as a result of a given investment, Keynes multiplier theory attaches great importance to increase in public investment and government expenditure for raising the level of income and employment. The multiplier theory emphasizes that public investment is highly useful, nay necessary, for increasing income and employment in the country.

         It may be borne in mind that both consumption and investment create employment. If there is unemployment or less than full employment, increase both in consumption and investment will increase employment. In this respect they stand in complementary relationship with one another. When investment increases, consumption increases too and help in creating employment. It is only when the level of full employment has been reached that investment and consumption become competitive instead of being complementary; then increase in one will reduce other; one will be at the expense of the other.