The Theory of Multiplier: An Explanation
The theory of multiplier occupies an important place in the modern theory of income and employment. It states that total increase in income, output or employment is manifold the original increase in investment. Take for example- if an investment to the tune of N50,000 is made, then the income will not just be N50,000, but a multiple of the same amount of initial investment.
Therefore, if the national income increases to N150,000 due to the initial investment of N50,000, then the multiplier is equals to 3; etc. In this vein therefore, the multiplier can be seen as the ratio of increment in investment. Take note of the formular thus- If ΔI stands for increment in investment and AY stands for the resultant increase in income, then multiplier is equal to the ratio of increment in income (Δy) to the increment in investment (ΔI). Therefore k = ΔY/ΔI where k stands for multiplier.
A Brief History of the Theory of Modifier
The concept of multiplier was first of all developed by F.A. Kahn in the early 1930s. But Keynes later further refined it. F.A. Kahn developed the concept of multiplier with reference to the increase in employment, direct as well as indirect, as a result of initial increase in investment and employment. Keynes, however, propounded the concept of multiplier with reference to the increase in total income, direct as well as indirect, as a result of original increase in investment and income. Therefore, whereas Kahn’s multiplier is known as ’employment multiplier’, Keynes’s multiplier is known as investment or income multiplier.
The Equilibrium Level of Income
The equilibrium level of income has to do with a situation whereby an economy or a particular business enterprise has an equal amount of production and market demand. The equilibrium level of income can also be defined (using a microeconomic level example) as the point at which a company is able to sell all of the goods it planned to. Now having understood the macroeconomic perspective, it should be easy to now understand the macroeconomic level of the equilibrium level of income. In other words, at the the national level, gross domestic product (GDP) represents the business manufacturing its products. All the businesses, consumers, investors, and government spending in the economy represent the consumers buying those products…
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