INCOME MODEL MULTIPLIER
M.POURHOSSEINI
MACROECONOMIC BACKGROUND
• IN THIS TUTORIAL
WE REVIEW SOME
BASIC
MACROECONOMIC
AGGREGATES
• The purpose is to
provide the students
whose first degree is
not economics with
some basic tools
• Multiplier
THE DETERMINATION OF NATIONAL INCOME
• The multiplier: introduction
– the circular flow of income and effects of
changes in injections
A simplified circular flow of income model
A simplified circular flow of income model
J=I+G+X
A simplified circular flow of income model
J=I+G+X
Incomes
A simplified circular flow of income model
J=I+G+X
Incomes
Cd
W=S+T+M
THE DETERMINATION OF NATIONAL INCOME
• Equilibrium national income
– withdrawals equal injections
– income equals expenditure
• The multiplier: introduction
– the circular flow of income and effects of
changes in injections
– definition of the multiplier: DY/DJ
THE DETERMINATION OF NATIONAL INCOME
• The multiplier: the withdrawals and
injections approach
– graphical analysis: shift in the J line
The multiplier: (a) a shift in injections
W, J
W
a
O
Ye1
J1
Y
The multiplier: (a) a shift in injections
W, J
W
b
J2
a
O
Ye1
J1
Ye2
Y
The multiplier: (a) a shift in injections
W, J
Multiplier = DY / D J
= DY / DW
= c - a / b- c
W
J2
J1
O
b
DJ
DW
a
Ye1
DY
J2
c
J1
Ye2
Y
THE DETERMINATION OF NATIONAL INCOME
• The multiplier: the withdrawals and
injections approach
– graphical analysis: shift in the J line
– the formula: 1 / mpw
or: 1 / (1 – mpcd )
THE DETERMINATION OF NATIONAL INCOME
• The multiplier: the withdrawals and
injections approach
– graphical analysis: shift in the J line
– the formula: 1 / mpw
or: 1 / (1 – mpcd )
– numerical illustration
THE DETERMINATION OF NATIONAL INCOME
• The multiplier: the withdrawals and
injections approach
– graphical analysis: shift in the J line
– the formula: 1 / mpw
or: 1 / (1 – mpcd )
– numerical illustration
– the withdrawals multiplier
The multiplier: (b) a shift in withdrawals
W, J
W1
a
O
Ye1
J
Y
The multiplier: (b) a shift in withdrawals
W, J
W1
W2
O
a
c
Ye1
Ye2
J
Y
The multiplier: (b) a shift in withdrawals
W, J
Multiplier = DY / DW
= c - a / a- b
W1
W2
a
c
DW b
O
Ye1
DY
Ye2
J
Y
THE DETERMINATION OF NATIONAL INCOME
• The multiplier: the withdrawals and
injections approach
– graphical analysis: shift in the J line
– the formula: 1 / mpw
or: 1 / (1 – mpcd )
– numerical illustration
– the withdrawals multiplier
• The multiplier: the income and expenditure
approach
THE DETERMINATION OF NATIONAL INCOME
• The multiplier: the withdrawals and
injections approach
– graphical analysis: shift in the J line
– the formula: 1 / mpw
or: 1 / (1 – mpcd )
– numerical illustration
– the withdrawals multiplier
• The multiplier: the income and expenditure
approach
– graphical analysis
The multiplier: (c) a shift in the expenditure function
E, W, J
Y
E1
O
Ye1
Y
The multiplier: (c) a shift in the expenditure function
E, W, J
Y
E2
E1
O
Ye1
Ye2
Y
The multiplier: (c) a shift in the expenditure function
E, W, J
Y
Multiplier = DY / D J
= c - a / b- a
E2
E1
c
DY
b
DJ
a
O
Ye1
Ye2
Y
THE DETERMINATION OF NATIONAL INCOME
• The multiplier: the withdrawals and
injections approach
– graphical analysis: shift in the J line
– the formula: 1 / mpw
or: 1 / (1 – mpcd )
– numerical illustration
– the withdrawals multiplier
• The multiplier: the income and expenditure
approach
– graphical analysis
– numerical illustration
THE DETERMINATION OF NATIONAL INCOME
• The multiplier: some qualifications
– deriving the mpcd from the mpc
– effects of changes in one injection or
withdrawal on other ones
• Relationship between the 45° line diagram
and the AD and AS diagram
Showing the multiplier effect on the 45o line and AD/AS diagrams
Y
Cd, W, J
E1
O
Ye
Y
Showing the multiplier effect on the 45o line and AD/AS diagrams
P
AS
AD1
O
Y
Y
Cd, W, J
E1
O
Ye
Y
Showing the multiplier effect on the 45o line and AD/AS diagrams
P
AS
AD1
O
Y
Y E2
Cd, W, J
E1
O
Ye
Ye2
Y
Showing the multiplier effect on the 45o line and AD/AS diagrams
P
AS
AD1
O
AD2
Y
Y E2
Cd, W, J
E1
O
Ye
Ye2
Y