What is the Multiplier Effect?

During the economic crisis that began around 2010, people have taken various rationality to keep trying economic growth and maintain a stable government system without hurting. There seems to be a disagreement in opinion as to whether or not it will contribute to the growth that can happen or whether it will be damaged when reviewing how government expenditure and its impact on the growth of Gross Domestic Product (GDP) . By using the multiplier effect, the government can estimate how to adjust government expenditure, and how it will affect consumer spending, investment, and domestic export expenditure.

There is a relationship between investment and consumption. The new investment has a so-called multiplier effect. In other words, investment funds paid to wage laborers or suppliers will be revenue, then wage laborers and suppliers will use most of their income, so it will be income from others. Therefore, the expanded ripple effect starts to move. This principle suggests that slight changes in consumption expenditure may result in changes in the proportion of investment. The accelerator model is based on the rationale that if the capital / production ratio is the same, the increase in production can only be achieved by the increase in capital stock. Companies need a certain amount of capital to produce current levels of production. If output levels change, they will need more money. This change in capital is as follows.

The Input - Output model works through the development of a multiplier. Multipliers are a convenient way to summarize these chain reactions across the economy. For example, the multiplier of employment can capture all direct consequences of increasing work in a particular industry in the regional economy. Perhaps the most widely used I / O model was developed by the Department of Economic Analysis (BEA) of the US Department of Commerce. BEA developed a regional input / output modeling system (RIMS) model in the mid 1970's. In the mid 1980s, this model was greatly improved and the new model was named RIMS II. The RIMS II model is regularly updated (US Department of Commerce, 1992). The multiplier that BEA provides for the model is based on extensive data obtained from national and regional economies. Calculate the multiplier of the region composed of the whole country, individual state, individual county, or group of counties

Negative multiplier effect Keynes spread the idea of ​​the multiplier effect. This view thinks that the impact of declining infusion of the economy will have an impact and the final impact may exceed the initial impact. As companies reduce their investment, they lose their jobs and the rise in the unemployment rate leads to a reduction in expenditure and affects everyone in the economy. According to classical economic theory, the labor market should be clear. In this model, the unemployment rate is maintained artificially above the equilibrium, such as the minimum wage. (Real wage unemployment) According to classical theory, the solution to the unemployment problem is to lower wages and clarify wages. However, Keynes thinks that this is not satisfactory.