Investment Multiplier

concept of investment multiplier

1. INVESTMENT MULTIPLIER
BY HEMANSHU
B.Com(hons)II sem
Sec-B

2. DEFINATION
Investment multiplier is an important
contribution of Prof. J.K. Keynes.
Keynes believed that an initial increment in
investment increase the final income by
many times.
Multiplier express the relationship between an
initial increment in investment and the
resulting increase in aggregate income.

3. ExAmplE
Multiplier (k) is the ratio of increase in national income (∆Y) due
to an increase in investment (∆I).
K= ∆Y/∆I
•Suppose an additional investment (∆I) of RS 4,000 crores in an
economy generates an additional income (∆Y) of Rs 16,000
crores. The value of multiplier (k), in this case will be:
k =16,000/4,000 = 4
It means, income increased 4 times with a single increase in
investment

4. Multiplier and MpC
There exists a direct relationship between MPC
and the value of multiplier.
The concept of multiplier is based on the fact
that one person’s expenditure is another
person’s income.

5. When investment is increased, it also increases the
income of the people. People spend a part of this
increased income on consumption. However, the
amount of increased income spent on consumption
depends on the value of MPC.
1.In case of higher MPC, people will spend a large proportion
of their increased income on consumption. In such case,
value of multiplier will be more.
2. In case of low MPC, people will spend lesser proportion of
their increased income on consumption. In such case, value
of multiplier will be comparatively less.

6. algebraiC relationship
•We know, at equilibrium, income (Y) is the
sum total of consumption (C) and investment
(I).
Y = C + I
•Similarly, any change in income (∆Y) will also
be equal to (∆C + ∆I).
∆Y = ∆C + ∆I
•Dividing both sides by ∆Y, we get