LEAKAGES IN MULTIPLIER
Leakages in Multiplier�
Leakages in Multiplier
In words of Peterson ,”Income that is not spent on currently produced consumption goods and services may be regarded as having leaked out of income stream .”
The more powerful these leakages are ,the smaller will be the value of multiplier.
Important Leakages
Idle saving leads to fall in marginal propensity to consume as the result the value of multiplier falls.
Higher the MPS greater is the leakage from income propagation and smaller is the value of multiplier.
Important Leakages
When some part of increased income is used to purchase old shares and govt. securities then the flow of income stream falls. It is because this part of income is not spent on consumer goods .
Important Leakages
Many companies do not distribute all the profits among the shareholders; as they keep a part of it as a reserve fund. The undistributed profits is also a leakage of the multiplier because this amount is not used by shareholders for consumption purposes.
Important Leakages
The part of increased income which is spent in paying of old debts is not spent on consumption This leakage also restrict the process of income generation .
Important Leakages
Important Leakages
�Increase in income leads to increase in consumption . If the increased demand for consumer goods is met out of the existing stocks and new consumer goods are not produced then this is also an leakages.
Important Leakages
When people want to hold more money in cash for transaction, precautionary and speculative motives, it would imply less consumption expenditure and it also serves as a leakage of multiplier.
Important Leakages
Under inflationary situation people have to spend more money to buy same amount of goods and services as before. So there will be not much increase in level of consumption and ultimately multiplier effect will remain limited.
Important Leakages
If taxes on goods are increased and progressive taxes on income are increased then there will be no increase in consumption despite of increase in income . As a result process of income propagation slows down and come to halt.
Importance of Multiplier
Concept of multiplier tells us that income propagation is a natural process. It tells that increase in employment, income and output is due to increase in investment.
Importance of Multiplier
Importance of Investment:
Multiplier tells the importance of Investment. Initial increase in the investment results in multiple increase in income . Investment is that dynamic element on which changes in employment depend.
Importance of Multiplier
Trade Cycles:
Trade cycles tells business fluctuations which take place over a period of long run. Sometimes there is a boom and at another time there is depression in business. So multiplier helps in understanding trade cycles .
Importance of Multiplier
Full Employment:
Multiplier’s concept is of great importance while formulating policy regarding full employment.
Importance of Multiplier
Deficit Financing:
As a result of deficit financing investment increases and increase in investment causes multiple increase in income in terms of multiplier effect. Thus deficit financing helps in removing bad effects of depression.
Importance of Multiplier
Equilibrium between Saving and Investment can be achieved through change in the level of income.
Importance of Multiplier
Public Investment:
Concept of multiplier tells if during depression, a little increase in public investment is made, it will lead to multiple increase in income such an increase in income will help in controlling depression and unemployment. This highlights the importance of Public Expenditurte.
Relationship between Multiplier and Public investment
Multiplier proves that if during depression public investment is increased, it will lead to multiple increase in income. For full-multiplier effect of investment, the govt. should take care of the following factors :
Relationship between Multiplier and Public investment
Relationship between Multiplier and Public investment
Relationship between Multiplier and Public investment
Public investment should be done so as to get maximum multiplier effect. Care should be taken to ensure that as soon as boom situation appear, the govt. should curtail public investment. And increase it when depression situation appears.