Expenditure Multiplier

12 Key excerpts on "Expenditure Multiplier"

• 

  eBook - PDF

  Economic Dynamics with Memory

  Fractional Calculus Approach

  • Vasily E. Tarasov, Valentina V. Podoskina, Valentina V. Tarasova(Authors)
  • 2021(Publication Date)
  • De Gruyter

    (Publisher)

  The multipliers show how much the final indicators will change with the change of various economic factors. The concept of an economic multiplier was first proposed by Richard F. Kahn in the 1931 paper “The Relation of Home Investment to Unemployment” [185]. Using the employment multiplier (the Kahn’s multiplier), he proved that government spending on organizing of the public works not only leads to increased employment, but also leads to an increase in consumer demand, and this, in turn, contributes to the growth of production and employment in other sectors of the economy. The increase in ag-gregate expenditure (e. g., government spending for “public works”) can lead to the increase of output and income. In 1936, John Keynes published the book ‘The General Theory of Employment, Interest and Money,” [191, 193, 194, 192], which has led to the Keynesian revolution in economic analysis and the birth of modern macroeconomic theory. In this work, Keynes developed the concept of an economic multiplier and multiplicative effects. He proposed the concepts of investment multiplier, saving and consumption multi-pliers. An investment multiplier (the Keynes multiplier) describes how much the in-come increases with increasing investment per unit. The multiplier of accumulation (or consumption) shows how much the accumulation (consumption) increases with an increase in income per unit. In models with continuous time, the indicators and factors (exogenous and en-dogenous variables, impact and response) are usually described by continuously dif-ferentiable functions of time t . Let us consider a variable Y ( t ) , which depends on ex-ogenous (or endogenous) variable X ( t ) . If this dependence is linear, then the multiplier equation is written in the form Y ( t ) = mX ( t ) + b , (6.1) where m and b are some constants.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Austerity

  When It Works and When It Doesn't

  • Alberto Alesina, Carlo Favero, Francesco Giavazzi(Authors)
  • 2019(Publication Date)
  • Princeton University Press

    (Publisher)

  The problem is that an empirical model general enough to incorporate all possible inter-actions between macroeconomic and fiscal policy variables is impossible to estimate because the data available are limited. Thus modeling choices must be made, and they do affect the results. Alternative Ways of Measuring Multipliers Two definitions of multipliers are used in the literature. One looks at the effect on output (or some other macroeconomic variable) of a shift in spending (or taxes) that is not related to the state of the economy, such as during a war. In economists’ jargon an “exogenous” shift in spend-ing, a change that is not caused by the state of the economy or motivated by the need to stimulate the economy. This impact—measured as the ratio of the cumulative change in output to the initial shift in government spending—is computed at various horizons. In other words, assume that in year zero government spending is cut by 1% of GDP: the multiplier is defined as the ratio of the cumulative change in output up to some horizon—say 3 years—divided by the size of the shift in government spending in year zero. The approach has the drawback of overlooking the fact that follow-ing the initial shift, government spending (or taxes) will not remain constant: they will typically keep moving. This suggests an alternative measure: defining “multiplier” the ratio of the cumulative (discounted) output response to the cumulative change in government spending and taxes (also discounted), that is the initial shift, say in spending, plus the shifts in spending that followed the initial exogenous adjustment. This second measure has been advocated by some researchers 3 because 56 Chapter Four it captures the extent to which the size of the multiplier depends on the persistence of fiscal shocks. Although these two measures often produce multipliers of different sizes, when used consistently they rarely result in a different ranking of multipliers.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  The Eastern Caribbean Economic and Currency Union : Macroeconomics and Financial Systems

  • Alfred Schipke, Aliona Cebotari, and Nita Thacker(Authors)
  • 2013(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  Fiscal policies play an important role in the management of output fluctuations. A number of countries in the Eastern Caribbean Economic and Monetary Union (OECS/ECCU) used fiscal policies to stimulate economic activity in response to the fallout from the 2008–09 global economic and financial crisis. This chapter quantitatively analyzes the effects of government revenue and expenditures on output dynamics in the union. Given the relatively large share of government in the Eastern Caribbean economies, the currency peg to the U.S. dollar, and the level of development, changes in tax and public expenditure policies may play an important role in output dynamics. Conversely, factors such as the high degree of trade openness and the high level of public indebtedness may weaken the effectiveness of fiscal policy in stimulating economic activity. To assess the possible impact of fiscal policy, this chapter empirically evaluates the fiscal multipliers for the group of OECS/ECCU members.

  The next section discusses the role of fiscal multipliers and their usefulness in the design of fiscal policies aimed at managing output fluctuations. The data and methodology are briefly discussed in the subsequent section, which is followed by a section that presents the estimated multipliers.

  Passage contains an image

  The Role of Fiscal Multipliers

  Tax and public Expenditure Multipliers provide a quantitative measure of the change in output resulting from an increase in taxes or government spending, and are key parameters for evaluating the effectiveness of fiscal policies in managing output fluctuations. A public spending multiplier greater than 1 indicates that public expenditure is able to stimulate economic activity and produce a final increase in output larger than the initial increase in public spending. A multiplier less than 1 means that the initial increase in aggregate demand is eroded by effects that counteract the initial unitary increase in public spending. These counteracting effects are often due to the crowding out of productive private sector activities and because part of the intended fiscal impulse translates into higher imports that do not increase output. Taxes are expected to have a negative effect on GDP, so a multiplier of less than –1 would imply that collecting one unit of taxes causes a decrease in economic activity larger than one unit. This outcome could be due to the accompanying distortions created by an increase in taxes or to disincentives for productive private sector activities. A tax multiplier less than zero but more than –1 indicates that economic activity is able to at least partially recover from the initial effect of the extraction of one unit of output in the form of taxes.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Fiscal Policy & Business Cycles

  • Alvin H Hansen(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  General Theory. The magnitude of the leakages is determined by the portion of the marginal income which is not used for consumption expenditures, or, in other words, is saved. Thus, if the percentage saved is zero, the Multiplier is infinity. If the fraction which is saved is one tenth, the Multiplier is ten; if one fifth, five; if one third, three; if one half, two; and, finally, if 100 per cent is saved, the Multiplier is one, and, similarly, for intervening points. The Multiplier is thus the reciprocal of the marginal propensity to save, which determines the ratio of marginal saving to marginal income received. The Multiplier can equally well be stated in terms of the marginal propensity to consume. The Multiplier (K) stated in terms of the marginal propensity-to-consume

  From Charts 15 and 16 it is readily apparent that the income will not remain at the new high level reached unless the private investment or governmental outlays continue to be poured out in a continuous stream. As soon as the governmental expenditures are withdrawn, the income again falls to its previous level. This phenomenon is in no sense a peculiarity of governmental spending, but is equally true of private investment expenditures.

  The Acceleration Principle

  Thus, the Multiplier Principle concerns exclusively the effect of private investment expenditure or governmental expenditure, as the case may be, upon subsequent net additions to consumption expenditure. The Acceleration Principle, to which we now turn, concerns exclusively the effect of a net increase in consumption expenditures upon induced investment expenditures. If we are to measure the full effect of private investment expenditures or governmental expenditures, as the case may be, on income, we must take account of both the Multiplier and the Acceleration Principle; we must measure not only the effect of these initial expenditures upon subsequent consumption, but also the effect of the subsequent increases in consumption upon investment induced by increase in consumption expenditures.

  The volume of replacement investment expenditures is determined by the volume of consumption expenditures. In the event that consumption expenditures remain constant, no new

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Understanding Keynes' General Theory

  • B. Sheehan(Author)
  • 2009(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  This insight is very important for Keynes. It means that for any given level of real income (and employment), consumption expenditure will form the stable and predictable component of the aggregate demand price. Put another way Keynes thinks that consumption spending will not usually be the cause of sudden and violent economic disturbances in the short period. d) The investment and employment multipliers Keynes’ analysis of the propensity to consume allows him to introduce the multiplier effect into the General Theory model. With it Keynes is able to identify the complementary and precise relationship between the propensity to consume and changes in investment spending on the one hand, and the change in real income and employment on the other. To incorporate the multiplier effect into his framework Keynes first iden- tifies the concept of the marginal propensity to consume – that is the The Propensity to Consume and the Multiplier 79 change in aggregate consumption for a small change in aggregate real income. In fact Keynes defines two multipliers – the investment multiplier and the employment multiplier. 6 The investment multiplier is derived in the following way. A change in aggregate income ( Y w ) is equal to the change in expected consumption expenditure ( C w ) and the change in expected investment spending ( I w ) – see Equation 3. Y w = C w + I w (3) Revising Equation 1 above to consider a change in aggregate consump- tion spending ( C w ) Equation 4 can be derived. C w = χ ∗ Y w (4) where χ ∗ is the marginal propensity to consume that is dC w /dY w . Sub- stituting Equation 4 into Equation 3 allows Equation 5 to be derived. Hence: Y w = χ ∗ Y w + I w (5) Reworking Equation 5 to solve for Y w allows the investment multiplier to be developed – see Equations 6 and 7. (1 − χ ∗ ) Y w = I w (6) Y w = 1 1 − χ ∗ I w (7) The value of 1/1 – χ ∗ is equal to the investment multiplier which can be denoted by the symbol k.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Economics

  Theory and Practice

  • Patrick J. Welch, Gerry F. Welch(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  The multiplier effect also applies when nonincome‐determined expenditures are cut back. For example, a decrease in investment spending of $10,000,000, by the time it works its way through the economy, will cause the level of economic activity to decline by more than the initial $10,000,000 decrease. The multiplier effect is frequently used in local impact studies. Sometimes col- leges and universities, for example, will conduct economic studies and use a local multiplier to show how they bring positive economic benefits to a community. Students can be regarded as bringing injections into a local economy as they buy courses, hous- ing, food, books, and such. In addition, multipliers are used to justify large public projects like stadiums. The case is frequently made that a new stadium brings more fans into an area, becomes a tourist magnet, encourages spending for hotels and food, and thus creates additional employment and income for the area. In summary, changes in nonincome‐determined spending, such as investment spending, government and foreign purchases, and household expenditures from transfer payments or borrowing, will cause changes in economic activity that are a multiple of the initial change in spending. Application 5.3, “Ripples through the Economy,” provides three examples of the multiplier effect. The first deals with slumps experienced in western Pennsylvania because of coal and steel, the second with rewards from attracting conventions and sporting events to a city, and the third with recent problems in the auto industry. Keep in mind that the multiplier effect applies to both increases and decreases in spending. 7 Be careful when calculating the multiplier effect to always express the percentage of additional income not spent as a decimal. That is, if 20 percent of additional income is not spent, then the multiplier effect is determined by dividing the initial change in nonincome‐determined spending by 0.20, not by 20.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  An Introduction to Economics for Students of Agriculture

  • Berkeley Hill(Author)
  • 2013(Publication Date)
  • Pergamon

    (Publisher)

  In turn, workers in these expanding industries will have more in their pockets, some of which will be spent on domesti-cally produced consumer goods. Firms producing consumer goods will probably require more plant and machinery, reinforcing the original rise in demand for capital goods. Thus the effect of an initial amount of spend-ing in one sector of the economy spreads throughout the whole economy, rather as a stone dropped in a pond causes ripples to spread over the whole surface. Also, like ripples, the effects of the spending diminish with distance from the initial spending because, at each stage of income which the initial spending generates, a proportion is withdrawn and not passed on. Spending an extra £lm on new machine tools (injection spending) could cause total increased spending to add up to £4m because of the ripple effect, of which £lm will correspond to the initial spending on machine tools and £3m to the subsequent rounds of generated spending. The relationship between the initial spending and the total amount of spending is called the multiplier. Total spending generated (including initial increase in spending) Multiplier = Initial increase in spending In our example the multiplier would be 4. The size of this multiplier can be shown to be related to the fraction of each additional increase in Macro-economics - the workings of the whole economy 239 spending which is not passed on in a second round of domestic spending because of saving, taxation or the purchase of foreign goods. This fraction of the marginal £ which is not passed on is termed the Marginal Propensity to Withdraw (MPW). The multiplier is numerically equal to the reciprocal of the MPW. For example, if in passing round the circular flow of income one quarter of each additional £ of spending would be withdrawn through saving, taxa-tion or spending on imports etc. (i.e. the MPW is 1/4), then the multiplier will be 4. Similarly, if only 1/6 is withdrawn, the multiplier will be 6.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Time and the Macroeconomic Analysis of Income

  • Alvaro Cencini(Author)
  • 2013(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  Were C = 30 and / = 20, the marginal propensity to consume would be 3/5, and so on, the value of c varying according to the proportion of C and / in the identity Y = C + I. From what has been said it follows that the true multiplier must be derived from the total expenditure of income and not from its division into C and /. In other words, if any link between successive incomes can be found to exist it must result from the marginal propensity to spend and not simply to con-sume. Represented by a flow of expenditures through time, the multiplier is an attempt at establishing a causal relation between any given income and the result of its expenditure. It would therefore be mistaken to restrict this influence to consumption only. Expenditures on investment goods are as effective, from the multiplier point of view, as expenditures on consumption goods. Thus, we have now to analyse what kind of influence can be exerted by the marginal propensity to spend on incomes created by the production of consumption and investment goods. Firstly, we must determine the value(s) of the marginal propensity to spend. Apparently this problem is too wide to be tackled within the restricted limits of economics. Yet, social and psychological considerations can be laid aside if we limit our analysis to the problems of leakage. As has already been pointed out, the multiplier would be equal to infinity if there were no leakages due to the expenditure of income. It is important to notice that, according to Keynes, leakages can only be caused by income spending and that they are, there-fore, not that part of income 'run to waste so far as expendi-tures are concerned'. In fact, leakages must be related to expenditures for the very simple reason that every income is necessarily and totally spent: Cf + If~C + I=Y. THE MULTIPLIER ANALYSIS 73 By definition, income corresponds to the final purchase of consumption and investment goods.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Input-Output Analysis

  Foundations and Extensions

  • Ronald E. Miller, Peter D. Blair(Authors)
  • 2022(Publication Date)
  • Cambridge University Press

    (Publisher)

  Additionally, many other generalized multipliers are possible, such as value added that is created in each sector in the economy because of the new outputs or any one of many possible negative impacts; e.g., pollution generated or resources used in producing the new outputs. We examine income multipliers in some detail in this section; extensions to other effects follow in Section 6.2.3. The notion of multipliers rests upon the difference between the initial effect of an exogenous change and the total effects of that change. The total effects can be defined either as the direct and indirect effects (found from an input–output model that is open with respect to households) or as direct, indirect, and induced effects (found from a model that is closed with respect to households). 1 The multipliers that incorporate 1 In some discussions of multipliers in an input–output model, what we have called the initial effect is termed the direct effect. For later exposition – for example, in looking at shortcut methods for finding multipliers – when the power series approximation I  A ð Þ 1 ¼ I þ A þ A 2 þ A 3 þ      will be used, it seems to us preferable to associate “initial” with the I term, “direct” with A, and “indirect” with the remaining terms, A 2 þ A 3 þ    6.2 General Structure of Multiplier Analysis 239 direct and indirect effects are also known as simple multipliers. When direct, indirect, and induced effects are captured, they are often called total multipliers. 6.2.1 Output Multipliers An output multiplier for sector j is defined as the total value of production in all sectors of the economy that is necessary in order to satisfy a dollar ’ s worth of final demand for sector j’ s output. Simple Output Multipliers For the simple output multiplier, this total pro- duction is obtained from a model with households exogenous.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Changing the Indian Economy

  Renewal, Reform and Revival

  • Rama P. Kanungo, Chris Rowley, Anurag N. Banerjee(Authors)
  • 2018(Publication Date)
  • Elsevier

    (Publisher)

  The study regarding the effect of public expenditure on output in India gained prominence after the global financial crisis of 2008. Policy concerns due to the global shocks have increased the focus on the development of analytical models to estimate the effect of the fiscal multiplier. India has a long history of fiscal mismanagement that is associated with high levels of financial debts and deficits. Following the adoption of the FRBM Act in 2003, the union and state governments in India committed to engage in prudent fiscal spending and eliminate revenue deficits on account of unproductive spending. Thus understanding the nature and magnitude of fiscal multipliers could be helpful for formulating a strategy to wisely allocate scarce resources. In this regard, the major conclusions based on the existing studies are summarized below.

  Jain and Kumar (2013) estimated the value of the multiplier for union and state government expenditure during 1980–2011. The study found that: (1) the multiplier varied for different heads of expenditure, (2) the multiplier of capital outlay was higher both in the short and long run, (3) the revenue expenditure had a sizeable impact in the short run but the effect died over time and (4) the multiplier for state-level expenditure was higher than the centre's expenditure. Bose and Bhanumurthy (2013) also confirmed the presence of a strong multiplier effect of capital expenditure on output. They also estimated the tax multiplier to be negative and suggested that output could be increased by reducing the tax rates. Estimates notwithstanding, the role of country-specific settings (i.e. trade openness, capital mobility and exchange-rate regimes) play important roles in the determination of the multiplier (Koh, 2017 ). The issue is of importance in India because it is an emerging market with increasing integration into the global economy. Moreover, the high unemployment and income inequalities mean that timely assessment of the multiplier effect of developmental and non-developmental expenditure is necessary to manoeuvre the fiscal space. Developmental expenditure can provide much-needed impetus to economic development by improving infrastructure and productivity; however, the ratio of developmental expenditure, which accounted for 71% of the total revenue expenditure in the India during 1980–85, has steadily declined. Its share in total revenue expenditure reduced to 55% in 2000–05 before rising marginally to 58% during 2005–10 (State Finances Report, 2009-10

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Handbook of Macroeconomics

  • John B. Taylor, Harald Uhlig(Authors)
  • 2016(Publication Date)
  • North Holland

    (Publisher)

  2444 Handbook of Macroeconomics Proposition 3 (Open Economy Multipliers, Complete Markets) Suppose that markets are complete, then the fiscal multipliers are given by α c , t , CM s ¼ ^ σ 1 κ ð 1 ξ Þ e ν s 1 e ð ν ν Þð t + s Þ ν ν s < 0, ^ σ 1 κ ð 1 ξ Þ e ν s 1 e ð ν ν Þ t ν ν s 0 : 8 > > < > > : It follows that 1. for t ¼ 0 we have α c , t , CM s ¼ 0 for all s; 2. for t > 0 we have α c , t , CM s < 0 for all s; 3. for t ! ∞ we have α c , t , CM s t ! 0 for all s; 4. spending at zero and infinity have no impact: α c , t , CM t ¼ lim s ! ∞ α c , t , CM s ¼ 0 : The right panel of Fig. 2 displays consumption multipliers for a standard calibration. Consumption multipliers are very different in an open economy with a fixed exchange rate. For starters, part ( 1 ) says that the initial response of consumption is always zero, simply restating the initial condition above that c 0 ¼ 0. This follows from the fact that the terms of trade are predetermined and complete markets insure consumption. Part ( 2 ) proves that the consumption response at any other date is actually negative. Note that the Euler equation and the initial condition together imply that c t ¼ ^ σ 1 log P H , t P H : Government spending increases demand, leading to inflation, a rise in P H , t . In other words, it leads to an appreciation in the terms of trade and this loss in competitiveness depresses private demand, from both domestic and foreign consumers. Although we have derived this result in a specific setting, we expect it to be robust. The key ingredients are that consumption depends negatively on the terms of trade and that government spend-ing creates inflation. It may seem surprising that the output multiplier is necessarily less than one whenever the exchange rate is fixed, because this contrasts sharply with our conclusions in a closed economy with a fixed interest rate. They key here is that a fixed exchange rate implies a fixed interest rate, but the reverse is not true.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  The General Theory of Employment, Interest and Money

  • John Maynard Keynes(Author)
  • 2023(Publication Date)
  • Passerino

    (Publisher)

  10. The Marginal Propensity to Consume and the Multiplier

  WE established in Chapter 8 that employment can only increase pari passu with investment. We can now carry this line of thought a stage further. For in given circumstances a definite ratio, to be called the Multiplier, can be established between income and investment and, subject to certain simplifications, between the total employment and the employment directly employed on investment (which we shall call the primary employment). This further step is an integral part of our theory of employment, since it establishes a precise relationship, given the propensity to consume, between aggregate employment and income and the rate of investment. The conception of the multiplier was first introduced into economic theory by Mr. R. F. Kahn in his article on “The Relation of Home Investment to Unemployment” ( Economic Journal, June 1931). His argument in this article depended on the fundamental notion that, if the propensity to consume in various hypothetical circumstances is (together with certain other conditions) taken as given and we conceive the monetary or other public authority to take steps to stimulate or to retard investment, the change in the amount of employment will be a function of the net change in the amount of investment; and it aimed at laying down general principles by which to estimate the actual quantitative relationship between an increment of net investment and the increment of aggregate employment which will be associated with it. Before coming to the multiplier, however, it will be convenient to introduce the conception of the marginal propensity to consume.

  I

  The fluctuations in real income under consideration in this book are those which result from applying different quantities of employment ( i.e. of labour-units) to a given capital equipment, so that real income increases and decreases with the number of labour-units employed. If, as we assume in general, there is a decreasing return at the margin as the number of labour-units employed on the given capital equipment is increased, income measured in terms of wage-units will increase more than in proportion to the amount of employment, which, in turn, will increase more than in proportion to the amount of real income measured (if that is possible) in terms of product. Real income measured in terms of product and income measured in terms of wage-units will, however, increase and decrease together (in the short period when capital equipment is virtually unchanged). Since, therefore, real income, in terms of product, may be incapable of precise numerical measurement, it is often convenient to regard income in terms of wage-units (Y w ) as an adequate working index of changes in real income. In certain contexts we must not overlook the fact that, in general, Y w

  Sign up to read

  Learn more about book