Multiplier

12 Key excerpts on "Multiplier"

• 

  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 - 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

  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 - ePub

  Caribbean Renewal : Tackling Fiscal and Debt Challenges

  • Charles Amo Yartey, and Therese Turner-Jones(Authors)
  • 2014(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  Interpreting fiscal Multipliers requires caution, because they are not deep structural parameters. Instead, they consist of policy reactions and structural parameters. That is, fiscal Multipliers depend on various factors that can differ from case to case, such as the fiscal policy instrument, its duration, its associated fiscal adjustments, the stance of monetary policy, and country-specific circumstances. Multipliers are therefore best interpreted as empirical summaries of average output reactions following exogenous changes in government spending or tax revenue.

  Theories of Fiscal Multipliers

  Different theories provide different mechanisms for fiscal Multipliers, but they all highlight the importance of hours worked in explaining the short-run Multipliers.2 Since the capital stock cannot be adjusted instantaneously, only hours worked can increase total output in the short term. Therefore, the short-run Multipliers are essentially accounted for by the response of equilibrium hours worked to a fiscal policy and the extent to which those hours translate to output.

  The Keynesian tradition explains fiscal Multipliers through demand-side effects. Assuming that an economy is constrained by demand, not by supply, Keynesian theory says that government spending increases demand, which raises incomes, which in turn leads to private sector spending. In the extreme case where wages and prices do not respond, the Multiplier is given by 1/(1 − mpc ) for spending and —mpc /(1 − mpc ) for taxes, where mpc is the marginal propensity to consume. The Multipliers become smaller according to the extent of price adjustment, and zero in another extreme case where wages and prices are infinitely responsive. The Multipliers also depend on the monetary policy; they become larger when the central bank keeps the nominal interest rate constant. In a new Keynesian model calibrated to the U.S. economy, Christiano, Eichenbaum, and Rebelo (2011)

  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

  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)

  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.

  An estimate of the size of fiscal Multipliers is essential to the design and implementation of fiscal policies. If public spending Multipliers are smaller than expected, a country’s economy may end up in a trajectory that compromises the sustainability of public finance because expansionary fiscal policies will fail to boost economic activity sufficiently, and public indebtedness (together with the associated debt service) will increase as a percentage of GDP. Also, a tax Multiplier that is larger than expected may end up depressing economic activity more than anticipated, ultimately eroding the tributary base from which all taxes are collected.

  The magnitude of fiscal Multipliers has been under close scrutiny since the 2008–09 global financial and economic crisis. The crisis prompted large government intervention through tax reductions and expenditure programs across the world aimed at preventing a global deflationary scenario (see, for instance, Spilimbergo and others, 2008 ; Freedman and others, 2009 ; Hall, 2009 ; and Spilimbergo, Symansky, and Schindler, 2009

  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

  Time and the Macroeconomic Analysis of Income

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

    (Publisher)

  This can easily be verified by introducing the consumption function into the definition of income. From Y = C + I (2.1) and C=C(K), (2.2) 60 THE Multiplier ANALYSIS and assuming / = /, we have in fact what Samuelson calls one of the three seminal equations of economic theory: Y = C(Y) + I. (2.3) 'Equation [2.3] is crucially important for the history of economic thought. It is the nucleus of the Keynesian reasoning. If it in no way gives insight into the analysis of employment, then the Keynesian system is sterile and misleading.' 2 The importance of Kahn-Keynes's discovery cannot be over-looked, but its consequence is even more striking: the multi-plier establishes once and for all the existence of an objective link between successive incomes and represents the decisive and so desperately needed corroboration of the 'earning through spending' theory of income. Given the significance of the subject, we shall develop our critical appraisal very care-fully, starting with a systematic analysis of what is logically inherent to the theory. Didactically, we distinguish between two kinds of Multiplier, the horizontal Multiplier, which analyses the effects of a unique injection, and the vertical Multiplier, where injections are repeated from period to period. Where a single injection is con-cerned, the sum of induced incomes can be calculated only through time, horizontally, whereas in the case of a repeated injection this sum can be measured in a single period, vertically. As has been proved by P. Samuelson and by B. Schmitt, the horizontal and vertical Multipliers are identical: they are merely two alternative ways of describing the same process. Two alternative definitions of the Multiplier are met with in dynamic sequence analysis. The first measures the Multiplier by the increased level of income finally reached as the result of a continual stream of a unit expenditure, repeated in every period.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Classical Macroeconomics

  Some Modern Variations and Distortions

  • James C.W. Ahiakpor(Author)
  • 2003(Publication Date)
  • Taylor & Francis

    (Publisher)

  12 The mythology of the Keynesian Multiplier

  Introduction1

  Among the most misleading concepts in modern macroeconomics is the Keynesian Multiplier. It is also the main building block of Keynes’s (1936) aggregate demand management, and income and employment creation theory. The Multiplier concept invites acceptance by building on two fundamental truths: (a) people typically consume a fraction of their income and (b) such purchases for consumption are incomes for sellers. Thus, the concept argues that consumption spending releases purchasing power to producers and thereby validates their investment plans. Saving plays no positive role in supplying the funds for investment in Keynes’s reasoning, for example, “The investment market can become congested through the shortage of cash. It can never become congested through the shortage of saving” (1937:669), and “Saving has no special efficacy as compared with consumption, in releasing cash and restoring liquidity” (1938:321).

  Furthermore, according to the argument, consumption spending creates a Multiplier effect from some initial “autonomous” expenditure such that, in a simplified model, national income increases by a factor (k). That is, , where T is nominal income (GDP), k is the Multiplier, s is the marginal propensity to save is the marginal propensity to consume, and Z is the “autonomous” expenditure, such as investment or government expenditure that does not depend on domestic savings. Keynes (1933, 1936), by his elaboration of Richard Kahn’s (1931) earlier argument, thus exalts consumption spending to a magical significance in macroeconomic analysis, contrary to the classical emphasis on savings as the fountain of investment funds for production and employment growth, as explained in Chapter 9

  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

  Managing Corporate Impacts

  Co-Creating Value

  • Jennifer J. Griffin(Author)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  Three Multiplier effects are explored in this chapter: Multipliers along the value chain; Multipliers due to combining social, economic, and environmental effects; and Multipliers across geographies. 1 What are Multiplier (network) effects? Multiplier effects extend the interests of a firm beyond the direct hierarchical control of management to the multiple, and varied rela- tionships that co-create value with the firm. That is, the business of business is not just within the boundaries of the business itself but extends outwards to encompass stakeholders residing in numerous organizations: suppliers, suppliers of suppliers, wholesalers, journal- ists, retailers, kiosk owners, thought leaders, or recyclers. The relation- ships between members of this network with the focal firm might be direct or indirect, while the intended and unintended affects might cre- ate, or destroy, value. Multiplier effects extend positive impacts such 1 Multiplier effects over time are addressed in Chapter 9. What are Multiplier (network) effects? 129 as employment and wealth creation to the families of employees while also having the potential to heighten negative effects through disloca- tion or pollution, affecting local communities and neighboring com- munities well beyond the traditional bricks-and-mortar boundaries of a business. Multiplier effects reflect the ability of management to co-create value by influencing and being influenced by stakeholder networks. Managing Multiplier effects becomes influencing the influencers. That is, direct effects via legally binding contracts, for example, are necessary but not sufficient in explaining how value is created. Indirect effects significantly expanded by a firm’s Multiplier effects are increasingly important but are often overlooked as a means by which a firm becomes a catalyst for good or harm.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Social Accounting for Industrial and Transition Economies

  • Solomon Cohen(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Accordingly, the role of investment in these models is confined to that of enhancing the purchase of capital goods, and not of adding to the productive capacity. Whether the potential Multiplier effects of impulses will be realised in increased quantities in full or for a part disappear in incised relative prices depends on the elasticity of supply. If the size of the impulse is relatively small, which is usually the case, these Multipliers can still be seen to represent realisable quantity effects with little leakage into price effects. It was suggested in a previous chapter that one could check whether the capacity limits would be violated or not. To repeat, the supply side can be simply modelled as a relationship between the investment rate and economic growth via an incremental capital output ratio #c, as in KJY= k ( AY/Y). From the SAM we obtain Multiplier effects for K and F. If division of the Multiplier effects of K by those of Y gives values equal to or above K/Y for the base period then this implies that the SAM solves for sufficient investment to meet the projected See tables 6.1 and 6.2. (p. 115 andp. 117) 1 114 Social Accounting for Industrial and Transition Economies capacity increase. It is noted that Multiplier results show that this condition is fulfilled for both years. In principle, similar checks can be applied to trace whether the base period equilibrium in the balance of payments and the government budget are reproduced by Multiplier effects. The second problem is that of assuming average fixed values for coefficients representing the propensities to consume and to use intermediate deliveries in the production process. This is a shortcoming. Compared to averages, working with marginal coefficients is better since dynamic effects are given due consideration. Moreover, fixed coefficients do not allow for substitution effects since the SAM qualified framework takes relative prices as given and assumes quantity adjustment.

  Sign up to read

  Learn more about book