Question

Give any four points of importance of multiplier.                 

What is the importance of the multiplier?

What is the importance of multiplier in economic analysis and economic theory?

Answer 1

1. Income generation: The multiplier shows that an initial increase in investment automatically generates a multiplied increase in income, output, and employment. This process of income propagation is fundamental for maintaining and achieving full employment in an economy.
2. Full employment: The multiplier concept helps policymakers frame strategies to achieve full employment by indicating the need for a significant net injection of investment. This injection, through the multiplier effect, leads to a more substantial increase in overall income and employment.
3. Public investment: The multiplier gives added significance to public and private investment. It demonstrates that an increase in investment can lead to a multiplied expansion in income, output, and employment, making investment a dynamic tool for economic growth.
4. Trade cycles: The concept of multiplier assists in understanding business cycles (booms and recessions). During a boom, excessive investment increases income multiplier-wise, potentially leading to inflation, while in a depression, decreased investment reduces income. Thus, multiplier effects can help moderate trade cycles by adjusting investment levels.
5. Equilibrium between savings and investment: The multiplier helps achieve equilibrium in an economy by balancing savings and investment. Since savings and investment influence income levels, multiplier effects provide a mechanism to adjust income to maintain this balance, depending on the marginal propensity to consume (MPC).
6. Inflation and deflation control: The multiplier helps estimate how changes in investment affect the price level. During inflation, reducing investment can decrease income and demand, controlling prices, while during deflation or depression, increasing investment raises income and demand to stabilize the economy.
7. Government intervention: The multiplier supports the idea that government interference through investment can stabilize the economy. Even a small increase in government investment can lead to a large increase in overall income and employment owing to multiplier effects.
8. Deficit financing: The multiplier underlines the importance of deficit financing, where government borrowing to invest can stimulate economic activity. The resulting multiplier effect raises aggregate demand and helps combat deflation and unemployment during economic downturns.