Discuss Income Generation Process Through Multiplier In Details?

When a project involving employment takes place, multiplier effects take place that lead to further employment opportunities. This phenomenon occurs due to the following factors:

In the location of the project, the employees themselves require a range of services; for instance, workers at building site may want food on their lunch hour. Shops in the area will receive higher revenue and go on to make more profit. This will attract other store owners to the area, to eliminate abnormal profits made in the short run. These new stores then employ new workers. It should also be noted that new stores and such may require projects of their own, leading to an even larger multiplier effect.

• The secondary stage of the multiplier effect

As more people are employed, the average income of the regular citizen rises. Increased incomes lead to higher spending in the economy. As people are getting more money than before, they are highly likely to spend more, even if they save to an extent. This increase in spending in the economy pushes up aggregate demand (consumption is a major component of this) and leads to high levels of investment. This investment is in new projects, and the multiplier effect takes place again. It is easy to see how a circular flow develops.

• The average propensity to consume

The size of a multiplier effect depends upon the average propensity to consume of a nation. The average propensity to consume is a measure of how much increased income levels lead to increased spending in the economy. It is calculated by dividing the percentage change in consumption by the percentage change in income. A higher propensity to consume will lead to a greater multiplier effect.