“ Economics Revision

Presented by
Thabani Moyo

”
 Macroeconomics
• The Multiplier

• Public Sector

• Foregn Exchange Market

 Multiplier
Definition

• Broadly refers to an economic factor that, when increased

or changed, causes increases or changes in many other r
elated economic variables

• Every time there is an injection of new demand into the cir

cular flow of income there is likely to be a multiplier effect.
 Points to Note

• The multiplier must always be more than 1.

• The multiplier works in opposite directions.

• For example, suppose variable x changes by 1 unit, which cause

s another variable y to change by M units. Then the multiplier is
M
 Marginal propensity to consume (mpc)
Please note:

• mpc + mps is always = 1

• mps = 1 – mpc

• mpc = 1 - mps
THE MULTIPLIER IN A TWO SECTOR MODEL
• The size of the multiplier depends on the proportion of an
y increase in income that is spent.

• The larger the mpc the bigger the multiplier and the small
er the mpc the smaller the multiplier.

• It is the money that stays in the economy.

 Multiplier effect
• The multiplier relates to how much national income chang
es as a result of an injection or withdrawal such as an inv
estment.

• Initially there is an increase in injections into the economy

(investment, government spending or export), which woul
d lead to a proportionate increase in national income.
 Multiplier effect

• The extra spending would have knock-on effect and creat

e even more spending
 Multiplier
• The size of the multiplier will depend on the level of leaka
ges.

• (E.g.) assume firms increase investment spending by R10

00. This is done by ordering capital goods from domestic f
irms to the value of R1000.
 Multiplier effect

• Total spending has increased by R1000. Total roduction h

as increased by R1000, which also leads to an increase i
n R1000 in income. The increase in
 Multiplier effect

• Total spending has increased by R1000. Total production

has increased by R1000, which also leads to an increase
in R1000 in income.

• The increase in spending = the increase in production whi

ch = an increase in income
“ THANK YOU