Revision notes: What is the multiplier process? * An initial change in aggregate demand can have a much greater final impact on equilibrium national income * This is known as the multiplier effect * It comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending – in other words “one person’s spending is another’s income” * This can lead to a bigger eventual effect on output and employment
What is a simple definition of the multiplier?
It is the number of times a rise in national income exceeds the rise in injections of demand that caused it

Examples of the multiplier effect at work * Consider a £300 million increase in capital investment – for example created when an overseas company decides to build a new production plant in the UK * This may set off a chain reaction of increases in expenditures. Firms who produce the capital goods and construction businesses who win contracts to build the new factory will see an increase in their incomes and profits * If they and their employees in turn, collectively spend about 3/5 of that additional income, then £180m will be added to the incomes of others.
At this point, total income has grown by (£300m + (0.6 x £300m).
The sum will continue to increase as the producers of the additional goods and services realize an increase in their incomes, of which they in turn spend 60% on even more goods and services.
The increase in total income will then be (£300m + (0.6 x £300m) + (0.6 x £180m).
Each time, the extra spending and income is a fraction of the previous addition to the circular flow.
The Multiplier and Keynesian Economics * The concept of the multiplier process became important in the 1930s when John Maynard Keynes suggested it as a tool to help governments to maintain high levels of employment