Determinant of Income and Employment

Multiplier: Ultimate determinant of Income and Employment:

We have dealt with the instant determinants of income and employment that is, consumption and investment spending (C+I). Among autonomous consumption and investment are not associated to income. The ultimate determinant of income and employment is the multiplier. Any rise in investment raises income manifold due to multiplier effect. Therefore the concept of multiplier states the relationship among an initial and final increment in GNP. That is, the amplified or magnified effect of primary investment on income is termed as the multiplier effect. It is evaluated by the ratio of change in equilibrium income to alter in expenses transform in equilibrium income:

Multiplier (K) = change in expenditure/ change in expenditure

Or K = ΔY/ ΔI

While,

DY = change in equilibrium income;
DI = change in expenditure

Therefore, K is the co-efficient which shows the number of times at which income raised due to raise in investment. K can also be computed by the other way.

K = 1/ MPS

Where,
MPS = marginal tendency to save
Or,
K = 1/1 - MPC

Where,
MPC = marginal tendency to consume.

 

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