Multiplier

Origin: Kahn's Employment Multiplier

• Prof. R.F. Kahn first used the multiplier concept in his article titled "The Relation of Home Investment to Employment".​
• Kahn suggested that any increase in employment would cause a manifold increase in total employment in the economy.
• He defined the ratio of the final total increase in employment to the initial increase in employment as the Employment Multiplier.

• “Investment multiplier is the ratio of increase in income to given increase in investment.” —Prof. Dillard
• “The multiplier is the number by which the investment can be multiplied in order to get resulting change in income.” —Samuelson
• “Investment multiplier is the coefficient relating to an increment of investment to an increment of income.” —Hansen
• “Investment multiplier tells us that where there is an increment of aggregate investment, income will increase by an amount which is K times the increment of investment.” —Keynes

• Prof. J.M. Keynes, in his General Theory, extended Kahn's idea from employment to income.
• Keynes argued that an increase in investment in the economy would result in a manifold increase in income.
• He defined the ratio of the final total increase in income to the initial increase in investment as the Investment Multiplier (also called the Income Multiplier).

• The Keynesian multiplier establishes a relationship between investment and income.
• It is called the Investment Multiplier because it is the ratio of the change in income due to the change in investment.
• An increase in investment → initial increase in consumption → many times more increase in income.

• If investment increases by ₹5 crores and the ultimate increase in income is ₹20 crores:

\[\text{Multiplier}=\frac{20}{5}=4\]

• The multiplier is that number which, when multiplied by the amount of investment, gives the ultimate increase in income due to that investment.

• Kahn → Employment Multiplier (employment to employment ratio)
• Keynes → Investment Multiplier / Income Multiplier (investment to income ratio)
• The multiplier shows a direct, positive relationship between investment and income.
• The multiplier is always expressed as a ratio: \[\frac{\Delta Y}{\Delta I}\].
• The concept highlights that the final effect on income is always a multiple of the original investment.
• The multiplier process works because one person's expenditure becomes another person's income, which is then partly spent again — creating successive rounds of income generation.