“
Economics Revision
Presented by
Thabani Moyo
”
Macroeconomics
• The Multiplier
• Public Sector
• Foregn Exchange Market
Multiplier
Definition
• Broadly refers to an economic factor that, when increased
or changed, causes increases or changes in many other r
elated economic variables
• Every time there is an injection of new demand into the cir
cular flow of income there is likely to be a multiplier effect.
Points to Note
• The multiplier must always be more than 1.
• The multiplier works in opposite directions.
• For example, suppose variable x changes by 1 unit, which cause
s another variable y to change by M units. Then the multiplier is
M
Marginal propensity to consume (mpc)
Please note:
• mpc + mps is always = 1
• mps = 1 – mpc
• mpc = 1 - mps
THE MULTIPLIER IN A TWO SECTOR MODEL
• The size of the multiplier depends on the proportion of an
y increase in income that is spent.
• The larger the mpc the bigger the multiplier and the small
er the mpc the smaller the multiplier.
• It is the money that stays in the economy.
Multiplier effect
• The multiplier relates to how much national income chang
es as a result of an injection or withdrawal such as an inv
estment.
• Initially there is an increase in injections into the economy
(investment, government spending or export), which woul
d lead to a proportionate increase in national income.
Multiplier effect
• The extra spending would have knock-on effect and creat
e even more spending
Multiplier
• The size of the multiplier will depend on the level of leaka
ges.
• (E.g.) assume firms increase investment spending by R10
00. This is done by ordering capital goods from domestic f
irms to the value of R1000.
Multiplier effect
• Total spending has increased by R1000. Total roduction h
as increased by R1000, which also leads to an increase i
n R1000 in income. The increase in
Multiplier effect
• Total spending has increased by R1000. Total production
has increased by R1000, which also leads to an increase
in R1000 in income.
• The increase in spending = the increase in production whi
ch = an increase in income
“
THANK YOU
”