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Multiplier and accelerator

Chapter 44


investment is done, how much or how many times income increases, this can be known from the concept of multiplier. As investment is increased, the national income increases proportionately much more. How many times it increases depends on the marginal propensity to consume. The higher the marginal propensity to consume, the greater will be the increase in income as a result of investment. The higher the marginal propensity to consume, the bigger will be the multiplier. Multiplier is the ratio of the change in national income to the change in Investment.

Kahns Employment multiplier

It is also known as Kahns multiplier. When government undertakes public works like roads, railways, irrigation works then people get employment. This is initial or primary employment. These people then spend their income on consumption goods. As a result, demand for consumption goods increases, which leads to increase in the output of concerned industries which provides further employment to more people.

Kahns Employment multiplier

The process does not end here. The entrepreneurs and workers in such industries, in which investment has been made, also spend their newly obtained income which results in increasing output and employment opportunities. In this way, we see that the total employment so generated is many times more than the primary employment.

Keynes Income or Investment Multiplier

It shows that a given increase in investment ultimately creates total income which is many times the initial increase in income resulting from that investment. Income multiplier indicates, how many times the total income increases by a given initial investment. It is the ratio of the change in income to the change in investment. K= Y I

Limitations of Multiplier
Efficiency of production: If the production system of the country cannot cope with increased demand for consumption goods and make them readily available, the incomes generated will not be spend. As a result, marginal propensity to consume may decline. Regular investment: The value of the multiplier will also depend on regularly repeated investments. A steadily increasing investment is essential if the multiplier effect is not to be lost.

Limitations of Multiplier

Full employment Ceiling: As soon as full employment of the idle resources is achieved, further beneficial effect of the multiplier will be ceased.

Accelerator shows the effect of increase in income on the resultant investment. When income increases, peoples spending power increases; their consumption increases and consequently demand for consumer goods increases. In order to meet this enhanced demand, investment must be increased to raise the productive capacity of the community.

Initially, the increased demand will be met by over working the existing plants and machineries. All this leads to increase in profits which will induce entrepreneurs to expand their plants by increasing investment. Thus, a rise in income leads to a further increase in investment. So, accelerator is the numerical value of the relation between an increase in income and the resulting increase in investment.