Economics » National Income » The Multiplier and Its Effects

The Multiplier

Equilibrium national income changes if injections and/or leakages change. The multiplier analyses the magnifying effects of changes in leakages and/or injections on equilibrium income. The multiplier effect is the ability of a given initial change in demand expenditures to cause a bigger total change in equilibrium national income. The multiplier is the multiple of the change in demand expenditures by which the equilibrium national income rises. That is, for a given change in investment spending, the associated multiple changes by which equilibrium national income rises will be specially referred to as the investment multiplier.

If ΔY = change in national income and ΔI = change in investment expenditure, then, ΔY/ΔI = Investment multiplier which can be denoted as:

K = ΔY/ΔI ……………………………………………. (11.1)

Similarly, government expenditure multiplier can be denoted as:

K = ΔY/ΔG ………………………………………….. (11.2)


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