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Theory of Multiplier

R.F. Khan developed the concept of the multiplier in 1931 to describe how employment would increase based on an initial increase in investment. John Maynard Keynes later borrowed this idea and formulated the investment multiplier, which establishes a precise relationship between aggregate employment/income and the rate of investment given the propensity to consume. The investment multiplier, K, is the ratio of the change in income to the change in investment, where K equals total income divided by investment. Keynes also showed that the multiplier, K, equals 1 divided by 1 minus the marginal propensity to consume.

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Uday Pandit
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524 views

Theory of Multiplier

R.F. Khan developed the concept of the multiplier in 1931 to describe how employment would increase based on an initial increase in investment. John Maynard Keynes later borrowed this idea and formulated the investment multiplier, which establishes a precise relationship between aggregate employment/income and the rate of investment given the propensity to consume. The investment multiplier, K, is the ratio of the change in income to the change in investment, where K equals total income divided by investment. Keynes also showed that the multiplier, K, equals 1 divided by 1 minus the marginal propensity to consume.

Uploaded by

Uday Pandit
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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V R.F.

Khan developed the concept of


multiplier in his article ´¬ ¬ 

  ¬
¬¬ 

¬
in the economic journal of June 1931.
V Khan·s multiplier was the employment
multiplier. Keynes borrowed the idea
from khan and formulated the
investment multiplier.
V ccording to Keynes,µ establishes a precise relationship,
given the propensity to consume, between aggregate
employment & income and the rate of investment.
V When there is an increment of investment, income will
increase by an amount which is K times the increment of
investment i.e., Y=K I
V In the words of Hansen, Keynes· investment multiplier is the
coefficient relating to an increment of investment to an
increment of income, i.e. K= Y/ I
V Where Y is income, I is investment, is change (increment or
decrement) and K is the multiplier.
Y=C +I
Y= C+ I Dividing through by Y, we obtain
1= C/ Y+ I/ Y
I/ Y=1- C/ Y or
Y/ I=1/1- C/ Y where c= C/ Y that is MPC
Y/ I=1/1-c
K=1/1-c [K= Y/ I]
V IF MPC=1/2 & investment=Rs.1000 then k(multiplier will be 2.
V ¬here is change in V ¬here is net increase in
autonomous investment investment
and induced investment is V Consumer goods are
absent. available in response to
V ¬he marginal propensity to effective demand for
consume is constant. them.
V Consumption is a function V ¬here are no changes in
of current income only. price
V ¬here are no time gaps in V ¬he accelerator effect of
the multiplier process. consumption on
V ¬he new level of investment investment is ignored.
is maintained steadily for V ¬here is less than full
the completion of the employment level in the
multiplier process. economy.
V ñeakage are the V Price inflation
potential pitfalls from V Net imports
the income stream, V Undistributed profits
which tend to weaken
the multiplier effect of V ¬axation
new investment.
V Saving
V Strong liquidity
preference
V Purchase of old stocks
and securities
V Debt cancellation

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