MULTIPLIER

in economics, numerical coefficient showing the effect of a change in total national investment on the amount of total national income; it equals the ratio of the change in total income to the change in investment. If, for example, the total amount of investment in an economy is increased by $1,000,000, a chain reaction of increases in consumption expenditures is set off. Producers of raw materials that are used on directly affected investment projects and workers employed in such projects receive the $1,000,000 as increases in their incomes. If they spend on the average 3/5 of that additional income, $600,000 will be added to the incomes of others. At this point in the process, total income will have been raised by (1 $1,000,000) + (3/5 $1,000,000), or the amount of the initial expenditure on investment plus the additional expenditure on consumption. It will continue to increase as the producers of the additional consumption goods realize an increase in their incomes, of which they in turn spend 3/5 on consumption goods. The increase in total income will then be (1 $1,000,000) + (3/5 $1,000,000) + (3/5 3/5 $1,000,000). The process continues indefinitely; the amount by which total income increases may be computed by means of the algebraic formula for such progressions. In this case it equals 1/ (1 - 3/5), or 2.5. This means that a $1,000,000 increase in investment has effected a $2,500,000 increase in total income. The concept of the multiplier process became important in the 1930s when the British economist J.M. Keynes suggested it as a means of measuring the amount of government spending needed to compensate for a shortage of private investment in reaching a level of income at which full employment would prevail. The basic concept has since been applied to the cumulative effect of changes in many other variables on total income, such as changes in imports.