The Multiplier Flashcards
Marginal propensity to consume (MPC)
The proportion of any change in income that is spent rather than saved.
Marginal propensity to import (MPM)
The change in total spending on imported products following a change in income. The higher is the marginal propensity to import, the greater is the outflow of extra income in the circular flow model. A high MPM reduces the size of the multiplier effect.
Marginal propensity to (MPS)
The change in total savings arising from a small change in household disposable income. If income rises by £100 and £30 is saved, then the marginal propensity to save = 0.3 (i.e. the change in saving/change in income)
Marginal propensity to tax (MPT)
The change in taxation following a change in income.
Marginal propensity to withdraw (MPW)
The sum of the marginal propensity to save + marginal propensity to tax + the marginal propensity to import.
Multiplier
A calculation of the degree to which injections into the circular flow of income cause changes in final national income. Multiplier (k) = change in real GDP (Y)/change in injections (J). The formula used to calculate the size of any change in final national income that results from an increase in injections. The formula is 1/1-mpw where mpw is the marginal propensity to withdraw, or alternatively the formula 1/1-mpc can be used.
Multiplier process
A description of the multiplier effect which comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending – in other words “one person’s spending is another’s income”. This can lead to a bigger eventual final effect on output and employment.
Multiplier ratio
This is the ratio of a change in equilibrium real income to the injection that has brought it about. For example if a £1m injection into the circular flow results in a £2.5m increase in national income, the value of the multiplier is 2.5.
