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2021: Creating a Lexicon of Future
M is for Multiplier Effect
What is the Multiplier Effect?
The local multiplier effect refers to the increased wealth creation that occurs when money is spent locally and recirculates within the local economy.
Easy to measure in the domain of hard capital…
Generally, economists are usually the most interested in how capital infusions positively affect income. Most economists believe that capital infusions of any kind — whether it be at the governmental or corporate level — will have a broad snowball effect on various aspects of economic activity.
As its name suggests, the multiplier effect provides a numerical value or estimate of a magnified expected increase in income per dollar of investment. In general, the multiplier used in gauging the multiplier effect is calculated as follows:
Some economists also like to factor in estimates for savings and consumption. This involves a slightly different type of multiplier. When looking at savings and consumption, economists might measure how much of the added economic income consumers are saving versus spending. If consumers save 20% of new income and spend 80% of new income then their marginal propensity to consume (MPC) is 0.8. Using an MPC…
