imported>Todd Coles |
imported>Nick Gardner |
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| The spending multiplier is a key concept in [[Keynesian economics]] for it explains how the government purchases can have a strong stimulating effect on the national output, depending on the marginal propensity to consume. | | The spending multiplier is a key concept in [[Keynesian economics]] for it explains how the government purchases can have a strong stimulating effect on the national output, depending on the marginal propensity to consume. |
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| == Example in an closed economy ==
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| Consider a closed economy in which private agents consume in average 80% of their income. If the government increases its purchases by 100, then the national output will increase by 500.
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| <center>
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| {| class="wikitable" width="600"
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| |-
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| ! Agent
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| ! Consumption
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| ! Saving
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| |-
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| | Government
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| | 100
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| | 0
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| |-
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| | colspan="3" | ''Through consumption, the government increases by 100 the income of one of its suppliers (agent #2).''
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| |-
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| | #2
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| | 80
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| | 20
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| |-
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| | colspan="3" | ''Agent #2 saves 20% of his new wealth and spends the remaining money, increasing by 80 the income of agent #3.''
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| |-
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| | #3
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| | 64
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| | 16
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| |-
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| | #4
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| | 51
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| | 13
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| |-
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| | #5
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| | 41
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| | 10
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| |-
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| | #6
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| | 33
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| | 8
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| |-
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| | #7
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| | 26
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| | 6
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| |-
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| | ...
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| | ...
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| | ...
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| |-
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| ! Total
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| ! 500
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| ! 100
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| |}
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| </center>
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| In mathematics, this result is known as the sum of a convergent [[geometric serie]].
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| An other demonstration relies on the following accountant relation in a closed economy :
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| <center>
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| Income = Consumption + Investment<br>
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| Income = Private Consumption + Governmental Consumption + Saving - Taxes<br>
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| Y = C + G + I - T<br>
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| Since C = cY with c the propensity to consume, then<br>
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| Y = cY + G + I - T<br>
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| (1-c)Y = G + I - T<br>
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| Y = (G + S - T)/(1-c)<br>
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| Thus, an increase of G by 1 implies an increase of Y by 1/(1-c).
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| </center>
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| == Influence of imports in an open economy ==
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| <center>
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| {| class="wikitable" width="600"
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| |-
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| ! Agent
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| ! Consumption of domestic products
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| ! Imports
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| ! Saving
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| |-
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| | Government
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| | 100
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| | 0
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| | 0
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| |-
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| | colspan="4" | ''Through consumption, the government increases by 100 the income of one of its suppliers (agent #2).''
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| |-
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| | #2
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| | 60
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| | 20
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| | 20
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| |-
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| | colspan="4" | ''Agent #2 saves 20% of his new wealth and spends the remaining money. Because of imports, only three quarter of his purchases increase the income of another domestic agent. Thus agent #3 receives 60 instead of 80.''
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| |-
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| | #3
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| | 36
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| | 12
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| | 12
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| |-
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| | #4
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| | 21,6
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| | 7,2
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| | 7,2
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| |-
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| | #5
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| | 7,8
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| | 2,6
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| | 2,6
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| |-
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| | ...
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| | ...
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| | ...
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| | ...
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| |-
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| ! Total
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| ! 250
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| ! 50
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| ! 50
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| |}
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| </center>
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In economics, the spending multiplier effect describes a process by which an initial increase of one economic aggregate is amplified and provokes an increase in the same or/and other aggregate(s) larger than the initial raise. The idea is that the raise of a first agent income improves the situation of a second agent by the way of consumption, and so on.
The spending multiplier is a key concept in Keynesian economics for it explains how the government purchases can have a strong stimulating effect on the national output, depending on the marginal propensity to consume.
