The multiplier effect

The multiplier effect financially shows that significant infusions into the economy of money resources are multiplied in the process of their circulation in the economy of the state. While large foreign investments or significant government spending represent additional state revenue, which is equal to its original cost, other sectors of the economy will be stimulated with its help.

Thanks to the initial investments, the financing of expenditures for goods and direct labor is ensured, which leads to the creation of a significant number of jobs in the supply sector, and this increases the demand for services and goods in general. And shareholders and employees will benefit from this chain reaction, which was caused by the initial investment, demand will continue to grow, wages will rise, which will have a positive impact on profits. The end result of all this will be a positive impact on the consumer market. It is likely that the strongest effect of the multiplier will be investment in construction. Usually they have a stronger effect, affecting the entire economy in general. However, it can also experience a bad multiplier effect when large amounts are withdrawn from it if the state's expenses are significantly reduced, for example, when a large project that is associated with infrastructure development is canceled. In such conditions, there is a significant decline in the economy.

Theory of the multiplier

It is worth saying that in general, a multiplier is understood as the ratio of changes in income to a change in the component of autonomous costs. The essence of it is that the national income increases with the increase of any of the components of autonomous costs. The action of the multiplier in this case is as follows. For example, the initial amount of investment directed to the construction of residential buildings is one thousand dollars. All the owners of the factors of production, which were provided with resources for the organization of construction, will receive a certain income. Part of their earnings builders will present in the form of demand in the consumer goods market, while the second part is saved by workers. It turns out, that at other economic agents the monetary income will increase. A part of this income other economic agents will spend on purchasing consumer goods, the second part will go into savings.

This process is gradually capturing more and more segments of the population, who will present their income in the market of consumer goods in the form of demand. It turns out that the initial one thousand dollars will cause the growth of income and aggregate demand for some amount exceeding $ 1000. The effect of the multiplier in its magnitude depends on the propensity to consume and save.

In economic theory, it is customary to single out several types of multiplier:

- multiplier of public expenditure;

- tax multiplier;

- Multiplier of foreign trade.

If the population continues to invest in the economy of the country, they will not only gain additional income, but also additional goods, presented in the domestic market. Increased investment in the domestic economy can significantly increase the number of jobs, which solves a whole set of social problems. Negative effect is obtained because of the high propensity on the part of the population to save. In Russia, this situation is due to the fact that the population does not trust commercial structures that allow investments. That is why it is necessary to stimulate investment activity at the state level, due to which it is possible to achieve a significant economic effect.