MULTIPLIER:-
It is number of times increase in value of something.
Then, what is money multiplier?
Yes. You’re right. It is the number of times increase in value of money. If you have ₹100 in your pocket, how much value does it going to create? The obvious answer will be 100 but it’s incorrect, certainly more than that.
The answer depends on how much you are going to spend.
Suppose you are given a pocket money of ₹100. You have decided to spend ₹75 and save ₹25 for future use.
With ₹75 in your pocket, you are going to a Icecream shop. Once you reach there, you are buying a Butterscotch icecream worth ₹75. When you exchange something in turn of money or monetary value, It is called as a transaction. In this transaction, you have spent ₹75 for a icecream (expenditure) and the shopkeeper earned ₹75(income).
Then the shopkeeper goes to a stationery shop and buys a classmate note costing ₹56 for his child(expenditure ). The stationery shop keeper(income) gives him a classmate note in exchange for ₹56. After that the stationery shop owner would spend money on something and the process will go on expenditure becomes 0.
With ₹75 in your pocket, you are going to a Icecream shop. Once you reach there, you are buying a Butterscotch icecream worth ₹75. When you exchange something in turn of money or monetary value, It is called as a transaction. In this transaction, you have spent ₹75 for a icecream (expenditure) and the shopkeeper earned ₹75(income).
Then the shopkeeper goes to a stationery shop and buys a classmate note costing ₹56 for his child(expenditure ). The stationery shop keeper(income) gives him a classmate note in exchange for ₹56. After that the stationery shop owner would spend money on something and the process will go on expenditure becomes 0.
Therefore, one man's expenditure is other man's income.
Let's put it in a table:
ROUND | Expenditure | Aggregate Expenditure |
1 | 100 | 100 |
2 | 75 | 175 |
3 | 56.25 | 231.25 |
4 | 42.18 | 273.43 |
5 | 31.63 | 305.06 |
6 | 17.79 | 328.78 |
7 | 13.34 | 346.57 |
8 | 10.00 | 359.91 |
9 | 7.50 | 369.91 |
10 | 5.62 | 377.41 |
11 | 4.21 | 383.03 |
12 | 3.15 | 387.24 |
13 | 2.36 | 390.39 |
14 | 1.77 | 392.75 |
15 | 1.32 | 394.52 |
16 | 0.99 | 395.84 |
17 | 0.74 | 396.83 |
18 | 0.55 | 397.57 |
19 | 0.41 | 398.12 |
20 | 0.30 | 398.53 |
21 | 0.22 | 398.83 |
22 | 0.16 | 399.05 |
23 | 0.12 | 399.21 |
24 | 0.09 | 399.33 |
25 | 0.07 | 399.42 |
26 | 0.05 | 399.49 |
27 | 0.03 | 399.54 |
28 | 0.02 | 399.57 |
29 | 0.01 | 399.59 |
30 | 0.01 | 399.6 |
In Round 1, person 1 spends ₹100 on his consumption activity and person 2 earns a income of ₹75
(75/100×100)
In round 2, person 2 spends ₹56(75/100 ×75) and person 3 earns a income of ₹56. and so on.
Now if you add all the items in 'cumulative increase in expenditure', you will get a value higher than the initial ₹100. when you divide change in income(Y) by change in expenditure(E). you will get the multiplier value.
In this case,
Multiplier=🔼Y = 100-75 = 25
🔼E 75-56.25 6.25
= 4 times.
It means when you spend ₹100, it generates ₹400.
A real time example can be NREGA in Gujarat, the multiplier is as high as 4 i.e, when you put ₹100, it would generate ₹400. This is positive multiplier effect.
Imagine a situation, where the demand is less. What will the Icecream seller do if people like you didn't buy icrecreams. He will demand less Icecreams from the icrecream producer. The icecream producer will produce less icecreams and he will reduce costs by laying off few of his labors. The labors will be unemployed. They will look for employment opportunities but at time they will realise that there are lots of people looking for job because change in one sector drastically affected the whole economy. In this case, there will be lot of unemployed people but the national income will be still growing. This is negative multiplier effect.
So_Spend more_live happily!
