multiplier

multiplier

In economics, a numerical coefficient showing the effect of a change in one economic variable on another. One macroeconomic multiplier, the autonomous expenditures multiplier, relates the impact of a change in total national investment on the nation's total income; it equals the ratio of the change in total income to the change in investment. If, for example, the total investment in an economy is increased by $1 million, a chain reaction of increases in consumption is set off. Producers of raw materials used in the investment projects and workers employed in the projects gain $1 million in income. If they spend on average three-fifths of that income, $600,000 will be added to the incomes of others. The makers of the goods they buy will in turn spend three-fifths of their new income on consumption. The process continues such that the amount by which total income increases may be computed by an algebraic formula. In this case, the multiplier equals 1/(1 − 3/5), or 2.5. This means that a $1 million increase in investment creates a $2.5 million increase in total income. Other multipliers include the money multiplier, which measures money creation resulting from a change in monetary policy; the government spending multiplier, which measures the change in national income resulting from changes in fiscal policy; and the tax multiplier, which measures the changes in national income resulting from a change in taxes. The concept of the multiplier process was popularized in the 1930s by John Maynard Keynes as a means of measuring the effect of government spending.

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multiplier

1. a person or thing that multiplies

2. the number by which another number, the multiplicand is multiplied

3. Physics any device or instrument, such as a photomultiplier, for increasing an effect

4. Economics

a. the ratio of the total change in income (resulting from successive rounds of spending) to an initial autonomous change in expenditure

b. (as modifier): multiplier effects