Concept of multiplier

The concept of multiplier was first developed by R.F. Kahn in his article “The Relation of Home Investment to unemployment” in the Economic Journal of June 1931. Kahn’s multiplier was the employment multiplier. Keynes took the idea from Kahn and formulated the Investment multiplier. So, the concept of multiplier is regarded as one of the important contributions of J.M. Keynes to economics. The economists before Keynes were not unaware of the effect of an increment in investment on the increment of income. For example, Knut Wicksell, for the first time, had used multiplier in the context of inflation. Similarly, N. Johanson had explained it in 1903. But, the economists before Keynes had not been able to explain the concept of multiplier in a clear way.

Keynes used the concept of multiplier in the form of investment multiplier. According to Keynes, “Investment multiplier tells us that when there is an increment of aggregate investment, income will increase by an amount which is K times of the increment of investment”, i.e., DY=K×DI, where Y is income, I is investment, D is change (increment or decrement) and K is the multiplier. Then the multiplier is expressed as;

K=dY/dI  [ratio of change in income to the change in investment]

The multiplier expresses a relationship between an initial increase in investment and final increase in aggregate income. So, the multiplier theory shows that how many times the income increases as a result of an initial increase in investment or it is the ratio of an increase of income to given increase in investment. For example, if increase in investment is made by Rs. 10 lakhs. As a result, after some time period the total income increases to Rs. 50 lakhs. The income has increased by five times. Hence, the multiplier is 5. In the multiplier theory, the important element is the multiplier coefficient, K which refers to the power by which any initial investment expenditure is multiplied to obtain a final increase in income.

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