Mathematical Relationship between MPC and MPS | Micro Economics
Mathematical Relationship between MPC and MPS! The sum of MPC and MPS is equal to unity (i.e., MPC + MPS = 1). For sake of convenience, suppose a. Definition of multiplier in the Financial Dictionary - by Free online English dictionary and encyclopedia. Related to multiplier: multiplicand the ratio of an induced change in the EQUILIBRIUM LEVEL OF NATIONAL INCOME to an Thus, if MPC is and MPS is , the multiplier value is 10; if MPC is and MPS is. Investment Multiplier and Income: Meaning and Relationship with MPC, MPS! (a) Meaning: Investment increases productive capacity which, in turn, raises the.
And all this is saying is that if someone in this economy somehow finds another dollar in their pocket, they're going to spend 0. And the person to really spend it with is the farmer. Now given this assumption, let's think about what would happen in this economy if all of a sudden one of them decided to increase their spending a little bit. So we'll assume that they were all living happily. The economy was kind of at a steady state.
Investment Multiplier and Income: Meaning and Relationship with MPC, MPS
And let's say the farmer discovers a sock in a drawer that he didn't realize was there. And it's got a little bit of their agreed upon currency. Maybe the agreed upon currency in this island is a dollar. They've maybe got a stash when their shipwrecked on this, or whatever.
So the agreed upon currency is actually the dollar. And the farmer discovers that he's got-- he discovers a big pile of dollars in his sock. I need to do some repairs to my buildings.
So we have this kind of increase in spending that's going on. So he's going to spend, and the only person he can spend it with is the farmer. Somehow the economy seems to be picking up. He bought that much more food. I have a marginal propensity to consume of 0. So it will be I'll write it as a decimal-- it'll be 0. So he's going to spend 0.
I don't know, I could get a calculator to figure out what that is exactly. So let's say that I have 0. Or let's just write that-- 0. And I think you see where this is going.
So it's going to be-- I'll write it here-- it's going to be 0. So you're going to have 0. That's going to be 0. And I'll just calculated it.
MPC and multiplier
And it goes on and on and on. So the way to think about that, so the total-- and we could view it either way. Remember, you could view kind of the GDP. You could view that as the aggregate output. You could view that as the aggregate income, aggregate expenditure. These are all views because really the economy is a very circular thing.
One person's expenditure turns into another person's income. This multiple is called multiplier. Investment multiplier shows a relationship between initial increment in investment and the resulting increment in national income.
It is a measure of change in national income caused by change in investment. Thus, it explains the relationship between increase in investment and the resultant increase in income.
This equals increase in income divided by increase in investment. Investment multiplier indicates the multiplying effect of investment on income. Remember, the value of multiplier determines the rate of growth in the economy A higher value of multiplier will attain a higher level of income and growth.
This can be further clarified with the help of an example. Mind, multiplier works through consumption.
Suppose, government invests Rs crore in establishment of a fertilizer factory. The first impact of this new investment will be that the income of employees engaged in this factory will go up by Rs crore.
This is not the end of the story. The producers of these goods will have an extra income of Rs 75 crore. The process of increase in income stops when change in income becomes equal to change in saving. The process of working of multiplier is further illustrated in the following table.
The above table clearly shows that Initial increase in investment of Rs crore has resulted in an increase of additional income of Rs crore, i.