What is the multiplier effect?
An increase in investment or government spending can raise national income by a multiple of the initial amount. Richard Kahn introduced the employment multiplier in 1931 and Keynes developed the investment multiplier in the *General Theory* (1936).
📌 At a glance
- Origin
- Kahn (1931), Keynes (1936)
- Key variable
- Marginal propensity to consume (MPC)
- Simple formula
- 1 ÷ (1 − MPC)
- Leakages
- Taxes, imports, crowding out
Worked example
With an MPC of 0.8, $100 of new spending generates $80, then $64, and so on, summing to $100 ÷ (1 − 0.8) = $500 in the simple model.
| Multiplier | Simple formula | MPC = 0.8 |
|---|---|---|
| Spending | 1/(1−MPC) | 5 |
| Tax | −MPC/(1−MPC) | −4 |
| Balanced budget | Equal rise in spending and taxes | 1 |
Real multipliers are smaller because of taxes, saving, imports and crowding out.
Frequently asked questions
- What is the multiplier effect?
- The amplification of an initial change in spending into a larger change in national income.
- How is the simple multiplier calculated?
- 1 ÷ (1 − MPC); with an MPC of 0.8 it equals 5.
References
- Kahn, R. F. (1931). The relation of home investment to unemployment. Economic Journal, 41(162), 173–198.
- Keynes, J. M. (1936). The general theory of employment, interest and money. Macmillan.