Multiplier effect
The multiplier effect is the effect of an injection of income into an economy upon the total income of that economy, which is a definitional consequence[1] of the circular flow of income model of the economy. The effect is to raise the total income of the economy by a multiple of the initial injection. and its magnitude is limited by income "leakages" (into, for example, taxation or spending on imports). If the recipients of the increases in income would otherwise be unemployed, the effect takes the form of an increase in the level of activity in the economy: if they would otherwise be fully employed, it takes the form of an increase in the general level of prices.
The multiplier effect is often referred to as a measure of the effect of fiscal policy upon the level of economic activity. In that context, Robert Barro has argued that its value is zero because any change in government spending will prompt taxpayers to save an equivalent amount in anticipation of a subsequent tax increase[2]
Estimates of its magnitude are made either by regression analysis of past data or by fitting past data into an economic model. Since its value may be expected to vary due to variations in the factors that influence the accuracy of current estimates may be limited by the intrusion of unanticipated factors.
- ↑ As is demonstrated in the article on the spending multiplier
- ↑ Robert J. Barro: Reflections on Ricardian Equivalence, National Bureau of Economic Research Working Paper No. w5502, March 1996
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