CIMA BA1 Syllabus A. Macroeconomic And Institutional Context Of Business - The Multiplier - Notes ^{6 / 17}

The multiplier

Imagine a consumer receives $100 more income - this will probably mean he/she spends more. 

This means the firms get more income and supply more and thus pay more wages

So the consumer gets more wages and spend more again. 

This is the multiplier effect

So for example a 100m initial increase could result in a final increase in national income of $140m.

The effect of a $100m injection is to increase national income by a multiplicative effect of $140m / 100m = 1.4.

This 1.4 is called a multiplier.

A short cut to calculating the multiplier is to use this formula:

Exam Style question

Change in Injections = 100
MPC = 0.7

Required:

Calculate the following figures:

1) Value of Multiplier 

2) Change in National Income

3) Change in Consumption

Solution

1. Value of Multiplier = 1 / (1 - 0.7) = 3.33

2. Change in National Income = 100 x 3.33 = 333

3. Change in Consumption = 333 - 100 = 233

This is easy

So if the MPC is 0.3 then the MPW is 0.7

Simple.