The concept of Multiplier was first developed by R. F. Kahn’s . Kahn’s multiplier was the Employment Multiplier. Keynes took the idea from Kahn and formulated the Investment Multiplier .
THE INVESTMENT MULTIPLIER :- Keynes considers his theory of multiplier as an integral part of of his theory of employment. The Multiplier , according to Keynes, ” establishes a precise relationship , given the propensity to consume, between aggregate employment and income and the rate of investment .It tells us that , when there is an increment of investment , income will increase by an amount which is k times the increment of investment ,
i.e.let change is denoted by ‘a’ , then aY = KaI.
or , k = aY/ aI .
In the multiplier theory , the important element is the multiplier co-efficient , K which refers to the power by which any initial investment expenditure is multiplied to obtain a final increase in income . the value of the multiplier is determined by the marginal propensity to consume. The higher the marginal propensity to consume , the higher is the value of the multiplier , the vice- versa. The relationship between the multiplier and the marginal propensity to consume is as follows – As change is denoted by ‘a’,
aY = aC + aI .
aY-CaY = aI . [ Because C= CaY]
aY[1-c] = aI,
aY = aI/1-c.
aY/aI = 1/1-c.
k = 1/1-c[k= aY/aI].
Since c is the marginal propensity to consume , the multiplier k is equal to 1- 1/c . The multiplier can be derived from the marginal propensity to save [ MPS] and it is the reciprocal of MPS .
k = 1/MPS .
The size of the Multiplier varies directly with the MPC and inversely with the MPS. Since the MPC is always greater than zero and less than one. The Multiplier is always between one and infinity. If the multiplier is one , it means that the whole increment of income is saved and nothing is spent because the MPC is zero . On the other hand an infinite multiplier implies that MPC is equal to one and the entire of income is spent on consumption. —– #——