How is the multiplier effect applied?
The multiplier effect can be used by anyone, whether that is governments, organizations or working individuals. Generally, these different entities and people will apply multiplier effect theory to quantify the effects of a given action (such as additional or decreased spending)….
For governments, the scale and magnitude of these variables (i.e., spending and income) is nationwide. That is, they look at the effect of government spending on total aggregate income (also known as output or GDP) in an economy. Individuals will likely apply the multiplier effect on a smaller scale, looking at the effect that an investment in, say, their education, can have on their future annual income. Equally, organizations will look at the effect that spending on machinery can have on revenue or profits. Regardless of who is applying the theory, the general formula to calculating the multiplier effect is as follows:
Multiplier Effect = Change in Income / Change in Spending
For example, say that the UK government spends £1 million in improving and renewing the infrastructure for public transport in London. Commuters in London appreciate these changes and increasingly use and spend more on public transport. The government notices that the increase in spending is £5 million from the time of their investment. Here, the injected income in the economy is £1 million, and spending has increased by £5 million. Therefore, the multiplier effect is 5 (£5 million / £1 million). This means that every £1 of government spending on public transport increased spending by £5.
More and more, people are noticing the versatility of applying the multiplier effect in real life. For example, the book Multipliers: How the Best Leaders Make Everyone Smarter (Wiseman, 2017) goes beyond the economic and numerical meaning of the Multiplier Effect exemplified above, and defines “multipliers” to be people that contagiously and naturally empower those around them to be the best version of themselves, creating thus a multiplier effect: