Question: Explain the Multiplier Process 4 Marks (1 Viewer)

[sarlovesyou]

Ok, I am confident with the actual calculations for the Multiplier, but have no clue how to answer the above question.

A basic outline of point to include would be great!

 

[midifile]

The multiplier process is pretty much the flow on effects on an economy as a result of increased incomes. So in your answer you could say:
- High incomes lead to increased expenditure, stimulating production
- This lead to greater levels of economic/GDP growth
- High incomes also leads to increased levels of infrastructure leading to increased education levels and improved health standards
- This leads to increases in economic development and quality of life

If you still have room/time left over, you can use an example ie South Korea (or any other NIE) and say that since the establishment of TNC's incomes have risen, leading to all the above effects, and allowing the nation to move from developing economy to NIE. If you did your globalisation case study on such a country, you will be able to include stats

 

[2162]

I think that is regarding domestically, but for international investment or investment for that matter, You could say that the multiplier process calculates the limiting sum (ie. total effect ) of an increase in investment on the economy. This is because, the money that is invested into the economy is then again invested.

Eg. MPC = 0.6 and the principal investment 30 000

Income Change Consumption (MPC) Savings(MPS)
30 000 18 000 12 000
10 800 6 480 3320
6480 and so on
so the total effect will be 18000 +6480 + ... until you get to a near definite value (ie the limiting sum).

So ineffect the 0.6 of 30000 and the 0.6 of the 0.6 of 30000 will be reinvested into the economy thus implying the total impact of such investment.

Please feel free to correct me if i'm wrong.

 

[munchiecrunchie]

what 2162 has said is pretty much what happens, but since its an explain process, you'd want some words to go with it:

1. Define the multiplier (the number of times an increase in national income exceeds the increase in aggregate demand that caused it)

2. Give a description of the process of the multiplier effect (each individual has a marginal propensity to consume, and so when they spend this proportion of it, firms receive this income, then the individuals in that firm spend the marginal propensity to consume, etc, which is in fact a limiting sum of a GP)

3. Desribe the effects of this (the increased spending allows the amount of income that flows to individuals to increase by an amount defined by the multiplier formula)

I reckon that should be enough to get the marks. If you wanted to secure the marks, maybe add in the economic growth objectives of the multiplier process.