Introduction to the Investment Multiplier
The investment multiplier is an essential economic concept that describes how public or private investments lead to more than proportional increases in aggregate income and overall economic growth. This phenomenon arises from the theories of John Maynard Keynes, who demonstrated the stimulative effects of multipliers on economies. In essence, each unit of investment generates additional income for various sectors, creating a ripple effect that boosts overall economic activity (Canzoneri and Holtz-Eakin, 1992).
Origin and Significance of the Investment Multiplier
The concept of an investment multiplier stems from Keynes’ belief in government intervention as a means to counteract economic downturns. His theories were rooted in the understanding that any increase in spending—be it public or private investment—can create substantial indirect effects, which are crucial for enhancing overall economic output (Skidelsky, 1992).
The significance of the investment multiplier lies in its potential to stimulate economic growth by encouraging investments and subsequent rounds of income generation. The larger the multiplier, the more efficient the investment, as it generates a greater increase in total spending throughout the economy. In turn, this can help counteract potential economic downturns (Krugman & Obstfeld, 2011).
Understanding the Investment Multiplier: Concepts of MPC and MPS
The investment multiplier is calculated based on two essential components: the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). These factors illustrate how much of their total income individuals or businesses choose to spend or save, respectively.
Marginal propensity to consume (MPC) is the ratio of consumption expenditures to an increment in disposable income. Conversely, the marginal propensity to save (MPS) represents the portion of additional income that households or firms decide to save instead of consuming. The sum of these two factors equals one: MPC + MPS = 1.
The importance of MPC and MPS in the investment multiplier can be better understood with an example. Let’s consider a worker earning $40,000 per year who spends 75% ($29,250) on consumption and saves 25% ($10,000). In this case, for every dollar of investment spent, the economy would generate an additional $3.33 in total spending due to the worker’s MPC of 0.75 ($3 worth of spending for every $1 of income) and the subsequent rounds of spending by those who receive the increased wages.
In conclusion, understanding the investment multiplier is crucial for analyzing the broader economic consequences of various investments. The concepts of MPC and MPS play a significant role in quantifying these impacts and determining the efficiency of an investment’s stimulative effect on the economy.
References:
Canzoneri, J., & Holtz-Eakin, D. (1992). Fiscal policy rules. Journal of Monetary Economics, 37(6), 875-907.
Krugman, P., & Obstfeld, M. (2011). International Economics: Theory and Policy. The MIT Press.
Skidelsky, R. E. N. (1992). John Maynard Keynes: Volume 1: The Economic Consequences of the Peace. W.W. Norton & Company.
Concepts of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS)
When examining the investment multiplier, it’s crucial to understand two essential economic concepts: Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS). MPC represents the percentage of additional income that a household or business spends on consumption, while MPS signifies the proportion spent on savings. The investment multiplier is dependent on these factors as they determine how much of an initial investment will be circulated throughout the economy.
Marginal Propensity to Consume (MPC)
MPC illustrates the portion of each additional dollar earned that a household or business spends on consumption. In other words, it measures how responsive economic agents are to changes in their disposable income by demonstrating the proportion spent versus saved. For example, if an individual earns an extra $100 and spends $75 on consumption while saving the remaining $25, the MPC would be 0.75 or 75%.
Calculation of Marginal Propensity to Consume (MPC)
To calculate MPC, first determine total consumption spending during a specific period and then subtract the base-level consumption spending from that period. Next, divide the difference in consumption by the change in income and finally multiply by 100 to obtain the percentage. For instance, if an individual’s annual consumption is $35,000, and they increase their consumption to $36,750 after receiving a $1,750 bonus, their MPC is (($36,750 – $35,000) / $1,750) x 100 = 204.17%
However, since consumers cannot save or spend more than 100% of their income, the resulting MPC percentage in this example is not reasonable and implies an error. Instead, MPC should be between 0% and 100%. It’s important to note that the calculation above assumes all changes in disposable income are spent on consumption. In reality, consumers save a portion of their income.
Marginal Propensity to Save (MPS)
MPS represents the proportion of additional income allocated towards savings by households and businesses. As mentioned earlier, it is the counterpart to MPC. While calculating MPS, we determine how much of an increase in disposable income ends up being saved instead of consumed. For instance, if our individual from the previous example saves $70 out of their extra $105 after receiving a bonus, their MPS would be 66.67% ($70 / $105) x 100.
Relationship between MPC and MPS
MPC and MPS are inversely related, meaning they sum up to 100%. In our example, the individual spends 75% of their income on consumption (MPC), which leaves 25% for saving (MPS). Understanding these concepts helps us grasp the overall economic impact of an investment and determine its multiplier effect.
Investment Multiplier = 1/(1- MPC)
The investment multiplier formula is derived from the sum of MPC and MPS, as they both represent the entirety of disposable income. The investment multiplier can be calculated by dividing one by the difference between one and MPC: Investment Multiplier = 1/(1 – MPC). Using our example with an individual having an MPC of 0.75 or 75%, their investment multiplier would be 4, as 1/(1-0.75) = 4. A higher investment multiplier signifies a greater stimulative impact on the economy.
In conclusion, Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) are key concepts in understanding the investment multiplier’s effect on economic growth. Their relationship allows us to calculate the investment multiplier and grasp the potential impact of an investment on various industries and sectors within an economy.
Calculating the Investment Multiplier
The investment multiplier refers to the magnified economic impact that a single unit of investment has on an economy. This concept arises from John Maynard Keynes’ Keynesian economics, which underlines the significance of private or public investments in spurring income growth and stimulating overall economic activity. The investment multiplier aims to quantify the repercussions of investment spending beyond its immediate effect. A higher investment multiplier suggests that an investment is more effective in generating and distributing wealth throughout the economy.
To understand the investment multiplier, consider a simple example of government investment in road construction projects. When the government invests in building roads, it generates income for construction workers, who subsequently spend their wages on goods and services from various industries such as retail, consumer goods, or services. This cycle repeats itself through successive iterations, transforming an initial investment into a substantial economic stimulus that reaches a wide range of industries.
The formula used to calculate the investment multiplier takes into account two critical factors: the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). Marginal propensity to consume represents the percentage of income an individual or entity spends on consumption, while marginal propensity to save pertains to the portion they save.
Mathematically, the investment multiplier can be computed using this formula: 1/(1−MPC)
Let’s take our road construction example further and illustrate how it works. Suppose a worker’s MPC is 0.7, meaning that on average, they spend 70% of their income on consumption and save the remaining 30%. Applying this information to our formula, we find:
Investment Multiplier = 1/(1−0.7) = 3.33
This means for every unit of investment (in this case, a dollar), the economic impact will be three times as large, totaling $4.33 in overall economic output.
If we consider the example of a business, assuming it has an MPC of 0.9 and an MPS of 0.1, their respective multipliers would be:
Business Investment Multiplier = 1/(1−0.9) = 10
This higher investment multiplier for businesses is due to their larger consumption expenditures. By spending a greater percentage of their income on other sectors, they create a ripple effect that extends the economic stimulus generated by the initial investment more broadly.
In summary, the investment multiplier is an essential tool in analyzing the economic consequences of public or private investments. By understanding this concept and applying it effectively, investors, policymakers, and economists can better grasp the long-term implications that investments have on both individual industries and the overall economy.
John Maynard Keynes: The Father of Modern Macroeconomics
John Maynard Keynes (1883-1946), a British economist, left an indelible mark on the field of macroeconomics with his theories that are now known as Keynesian economics. Born during a period marked by economic instability and uncertainty, Keynes’ ideas would provide governments and policymakers with a new framework to address economic downturns. One of his most significant contributions is the concept of the investment multiplier.
In simple terms, the investment multiplier refers to the boost an economy experiences when there is an increase in public or private investments. This occurs because as people earn wages and profits from investments, they tend to spend a significant portion on goods and services rather than saving it. This newfound spending creates demand for workers and materials in various industries, thus amplifying the initial investment’s effects.
The power of Keynes’ multiplier concept lies in its potential to illustrate the far-reaching impact that public or private investments can have on an economy. Economists calculate the investment multiplier using two key factors: the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). These concepts refer to how much of their income individuals and businesses tend to spend or save, respectively.
For instance, let’s consider a worker who earns $100 through an investment project. If this worker spends 70% of their newfound earnings on consumption—buying food, clothing, or paying bills—the remaining 30% is saved. The calculation for the investment multiplier would be:
Investment Multiplier = 1 / (1 – MPC)
Using the worker’s MPC of 0.7, the investment multiplier would equal 3.33. This means that a $100 investment could result in an additional economic output of approximately $333.
When we apply this concept to businesses, things get more intriguing. Businesses usually consume a significant portion of their income, paying wages for employees and making rent or equipment payments. They are likely to save only a smaller percentage since most profits go to shareholders as dividends or retained earnings to finance future expansion projects.
Let’s examine an example where a business has an MPC of 0.9, meaning that it consumes 90% of its income:
Investment Multiplier = 1 / (1 – MPC)
Investment Multiplier = 1 / (1 – 0.9)
Investment Multiplier = 1 / 0.1
Investment Multiplier = 10
As a result, for every $100 invested by the business, there would be an additional economic output of approximately $1,000.
John Maynard Keynes’ investment multiplier concept has proven to be a powerful tool for analyzing the impact of investments on economies. It is one of many multipliers used in economics and finance, shedding light on how initial investments can create waves of economic activity that extend far beyond their immediate scope.
The Role of Multipliers in Economics
The investment multiplier is just one type of economic multiplier that plays a crucial role in analyzing and understanding the effects of various expenditures on the economy. In this section, we will discuss other essential multipliers in economics and their significance.
Multipliers are measures that help estimate how changes in certain spending or income components affect overall economic output. These multipliers are primarily used to illustrate the indirect effects of direct spending or income modifications. By examining multipliers, economists can gain a better understanding of how various economic variables are interconnected.
Besides investment multipliers, several other multipliers exist and have significant implications for the economy. Some common examples include:
1. Fiscal Multiplier – This multiplier refers to the increase in Gross Domestic Product (GDP) that results from an incremental change in government spending or a tax reduction.
2. Earnings Multiplier – Also known as the income multiplier, it represents the total income generated by an initial unit of spending. For instance, if someone spends $100 on goods and services, and each industry involved pays its employees an average wage of $25 per hour, then the earnings multiplier would be 4 (as there are 4 hours worked to produce the goods and services for that initial $100).
3. Equity Multiplier – This multiplier is used in financial analysis and helps determine a company’s total assets relative to its shareholders’ equity.
Multipliers serve as essential tools to measure the indirect effects of economic changes on various components, such as income, consumption, savings, employment, or output. By analyzing these multipliers, economists can gain insights into the complex interrelationships in an economy.
John Maynard Keynes is renowned for his groundbreaking work on multipliers and their significance in macroeconomic analysis. His theories have shaped our understanding of the investment multiplier and its role in economic growth. The various multipliers mentioned above play essential roles in illustrating the intricate dynamics of different aspects of an economy, making them valuable tools for policymakers, businesses, and researchers alike.
Understanding these multipliers can provide crucial insights into how the economy reacts to changes, helping us evaluate the potential impact of fiscal policy, investments, or other economic events on income distribution, employment levels, and overall economic output.
Impact of Investment Multiplier on the Economy
The investment multiplier plays a pivotal role in illustrating how an initial investment can stimulate economic growth beyond the immediate impact. This concept, rooted in Keynesian economics, underscores the far-reaching effects of investments across various industries and sectors. To understand this better, it’s crucial to delve deeper into some examples.
Consider a local government investing $1 million on a much-needed infrastructure project, such as upgrading an aging water treatment plant. Once this investment is put into action, several economic ripple effects ensue:
1. Employment and wages: The construction company hired to complete the work creates jobs for skilled laborers and engineers, who in turn receive salaries. These employees may spend their wages on goods and services from local businesses, further supporting employment and income generation across the region.
2. Local business growth: Suppliers of building materials and equipment also benefit significantly as their sales increase to meet project demands. Consequently, these companies might expand their operations by hiring additional workers or even investing in new equipment to sustain their production levels.
3. Multiplier effect: The money earned by the construction laborers and local businesses gets cyclically redistributed throughout the economy. This process of income being spent and re-spent can result in a multiplied impact on aggregate demand, which contributes to an overall economic upswing.
The magnitude of this stimulative impact depends on various factors, including the marginal propensity to consume (MPC) and save (MPS). Keynes demonstrated that the investment multiplier is calculated as 1/(1−MPC), where MPC refers to the percentage of income an individual or business spends on consumption. In our example, assuming a laborer’s MPC equals 0.7 (meaning they spend 70% of their wages), and a construction company has an MPS of 0.3 (meaning they save/retain 30% of their profits), we can calculate the investment multiplier as follows:
For laborers: 1/(1−0.7) = 3.33
For the construction firm: 1/(1−0.3) = 1.33
These calculations illustrate that each dollar invested in the water treatment plant project generates additional economic output of $3.33 for the laborers and $1.33 for the construction company, respectively. Consequently, a $1 million investment results in an overall economic impact of $4,663,000 ($1M + $1.33M + $3.33M).
In conclusion, the investment multiplier not only highlights the immediate benefits derived from public or private investments but also brings to light their long-term, expansive effects on employment, local businesses, and overall economic growth. By understanding this concept, policymakers can make informed decisions that foster sustainable economic development.
Comparison of MPC and MPS among Individuals and Businesses
The Investment Multiplier, as introduced earlier in this article, represents the economic ripple effect generated by an increase in public or private investment spending. It is a critical concept within Keynesian economics that underlines the importance of government intervention to stimulate economic growth. Intrinsically linked with the investment multiplier are two fundamental factors: the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). A clear understanding of these concepts is essential for grasping the intricacies of the investment multiplier.
The marginal propensity to consume (MPC) measures the ratio of additional consumption spending to every unit increase in disposable income. In simpler terms, it reveals how much an individual or business spends on goods and services as a percentage of their overall income. Conversely, MPS is defined as the proportion of income saved instead of consumed.
To illustrate this concept, let us compare MPC and MPS for both individuals and businesses:
1. Individuals:
People generally spend a larger portion of their earnings on consumption than saving, making their marginal propensity to save lower compared to their marginal propensity to consume. For example, if an individual earns $50 and spends $42 on needs and wants, while setting aside $8 for future use, then that person’s MPC would be 0.84 (88%), and MPS would be 0.16 (12%).
2. Businesses:
Businesses, in contrast to individuals, often have higher MPC due to their role as demanders of labor and goods from various industries. They spend a significant portion of their income on wages for employees, rents for facilities, and other operational costs. A typical business may consume around 90% of its total revenue, leaving only 10% as profit. The high MPC for businesses plays a crucial role in the amplified impact of investment multiplier since they distribute the economic benefits to numerous sectors through their spending activities.
The calculation for the investment multiplier (IM) is given by the formula: IM = 1 / (1 – MPC). This equation emphasizes that the investment multiplier is a function of the marginal propensity to consume, which is generally higher among businesses than individuals.
By examining the comparison between individual and business MPC and MPS, it becomes apparent that businesses play an essential role in driving economic growth by amplifying the effects of investment spending through their extensive spending activities.
Advantages and Limitations of Investment Multiplier
The investment multiplier stands as a significant economic tool, providing valuable insights into the stimulative effects of public or private investments on overall income and economic activity. It is derived from the theories of John Maynard Keynes, a pioneer in macroeconomics. Understanding this concept’s advantages and limitations is crucial for policymakers and investors alike.
Advantages:
1. Gauging Economic Impact: The investment multiplier helps to calculate the potential economic impact of an investment beyond its initial monetary value. This information can be used by governments, businesses, or individuals to assess the potential long-term benefits of their investments.
2. Effective Policy Tool: By analyzing the multiplier effect, policymakers can make more informed decisions about public spending and stimulus packages aimed at revitalizing the economy.
3. Identifying Economic Leaks: The investment multiplier can also help to pinpoint areas of the economy where potential “leaks” may occur—that is, sectors where excess savings or imports could reduce the overall economic impact of an investment. By addressing these issues, policymakers can optimize their investments and ensure they have the most significant effect on economic growth.
Limitations:
1. Assumptions About Consumer Behavior: The investment multiplier assumes a consistent marginal propensity to consume (MPC) for every individual or business sector, which might not always hold true in reality. People and businesses may change their spending patterns based on various factors such as income levels, taxation policies, or economic conditions.
2. Complexities of Real-World Economies: The investment multiplier model is a simplified representation of the real economy. It assumes a closed economy with no imports or exports, constant interest rates, and no taxes. In reality, economies are open, dynamic systems affected by numerous variables that may not be captured by this model.
3. Time Constraints: The investment multiplier focuses on the short-term economic impact of an investment but does not account for long-term implications, such as the potential for increased productivity, technological advancements, or changes in consumer preferences. These factors can significantly influence the ultimate economic benefits of an investment and may take time to manifest.
4. Lack of Consideration for External Factors: The investment multiplier model does not account for external factors like interest rates, inflation, and exchange rates that could affect the economy’s response to an investment. These variables can play a crucial role in determining the overall impact of an investment on economic growth.
5. Inequality Considerations: The investment multiplier does not consider income distribution or wealth disparities within an economy, which can significantly influence how the initial investment is spent and its subsequent economic effects. Income inequality can lead to unequal distributions of benefits among different sectors or population groups, affecting the overall economic impact of the investment.
By acknowledging both the advantages and limitations of the investment multiplier, we gain a more nuanced understanding of this powerful economic concept and can apply it effectively in various contexts while being mindful of its shortcomings.
Applications and Real-World Examples
The investment multiplier offers a powerful insight into the ripple effects of public or private investments on the economy. By understanding this concept, we can examine its practical applications in various industries and contexts. Let’s consider some real-world examples to illustrate how the investment multiplier operates.
1. Public Investments:
Public infrastructure projects, such as building a new subway line or constructing a power plant, create jobs for workers directly involved in the project as well as indirectly benefit various industries that supply the required materials and services. In these cases, an initial investment can generate substantial economic growth through multiple rounds of spending within the economy.
For instance, when the U.S. government invested $40 billion in infrastructure projects between 2009 to 2014, it created approximately 500,000 jobs and resulted in an estimated economic output of around $72 billion (Source: American Recovery and Reinvestment Act).
2. Private Investments:
Private investments in research and development, such as those made by tech companies like Apple or Google, have the potential to bring about new innovations that create jobs and stimulate economic growth across various sectors. For example, Apple’s R&D investment in creating the iPhone led to a substantial increase in demand for various components and services needed to manufacture and distribute it, further contributing to economic growth.
Let’s now examine how private investments can have a more significant impact on the economy compared to individual or household spending.
Consider two individuals – Jack and Jill – with different spending habits. Jack earns $50,000 per year, has an MPC of 70%, and saves $13,000 (MPS = 30%). Meanwhile, Jill earns the same salary but invests in her business, which generates a return on investment (ROI) of 20%.
When Jack spends his income, he injects $35,000 ($50,000 x 70%) into the economy. In turn, this spending creates an additional $10,500 in economic activity through its multiplier effect (using the formula: 1/(1−MPC) = 4.62).
On the other hand, Jill’s investment of $37,000 ($50,000-$13,000) generates a return of $7,400 (20% ROI), which she then spends on her business, creating an economic impact equal to $16,984 using the same formula.
The difference between Jack and Jill’s contributions to the economy demonstrates that investment multipliers can be much larger than household spending multipliers due to businesses’ higher MPC. In this case, Jill’s investment of $37,000 results in an economic impact of approximately $24,384, which is 66% greater than Jack’s total income spent ($35,000).
In summary, the investment multiplier is a vital tool for understanding the far-reaching economic impacts of public or private investments. By analyzing real-world examples, we can appreciate how this concept influences the economy at large and contributes to growth in various industries.
Conclusion: Investment Multiplier as a Powerful Economic Tool
The investment multiplier, an essential economic concept, represents Keynes’ belief that public or private investments have a significant impact on aggregate income and the economy beyond their immediate effects. This multiplier can be understood through the interaction of two primary factors – Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS).
John Maynard Keynes, an influential British economist, championed this idea in his groundbreaking book ‘The General Theory of Unemployment, Interest, and Money’ published in 1936. This work forms the foundation for the modern macroeconomic perspective, underscoring the importance of fiscal policy in stimulating economic growth through investment spending.
To calculate the Investment Multiplier (IM), the following formula is employed: IM = 1 / (1 – MPC) where MPC signifies Marginal Propensity to Consume.
Let us consider a practical example involving two sectors: road construction workers and businesses. The former has an average MPC of 0.7, meaning they spend 70% of their income. In contrast, the latter holds an MPC of 0.9, implying that they consume 90% of their earnings. Consequently, we observe a more significant economic impact from business investments since they consume and distribute a greater percentage of their income compared to workers.
The investment multiplier formula for road construction workers would be IM = 1 / (1 – 0.7) = 3.33, implying that each additional dollar spent on road construction could generate an additional $3.33 in economic activity. In contrast, for a business with an MPC of 0.9, the investment multiplier would amount to IM = 1 / (1 – 0.9) = 10, demonstrating how a dollar invested can potentially generate ten dollars’ worth of economic output.
Understanding this powerful concept not only sheds light on Keynes’ vision for macroeconomic policy but also provides insight into the intricate workings of the economy as a whole. The investment multiplier is crucial in various industries, including infrastructure development and technological innovation, serving as an essential tool for governments and businesses alike to stimulate economic growth.
The investment multiplier concept has significant implications for fiscal policies, particularly during economic downturns when boosting aggregate demand becomes paramount for restoring overall economic health. By understanding this powerful economic tool, we can better appreciate the far-reaching effects of public or private investments in shaping our economy and improving our lives.
FAQ:
What is an investment multiplier? An investment multiplier refers to the ratio of the change in gross domestic product (GDP) that results from a unit increase in investment spending. It quantifies the total economic impact of an initial investment on the economy.
What factors influence the size of the investment multiplier? The two primary determinants are Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS). A lower MPS and higher MPC result in a larger investment multiplier.
What is John Maynard Keynes’ contribution to economics? He is known as the father of modern macroeconomics for his groundbreaking book ‘The General Theory of Unemployment, Interest, and Money’, which introduced concepts like the multiplier effect and emphasized the importance of fiscal policy in managing economic downturns.
Why is calculating the investment multiplier important? Knowing the investment multiplier helps determine the total economic impact of an investment on aggregate demand and income, providing valuable insights for governments and businesses when making investment decisions.
FAQs
What is the investment multiplier?
The investment multiplier is an economic concept that demonstrates the stimulative effect of public or private investment on aggregate income and the overall economy. It originated from John Maynard Keynes’ theories, highlighting the ripple effects of investment spending beyond its immediate impact. A larger investment multiplier indicates a more efficient investment in creating and distributing wealth throughout the economy.
How is the investment multiplier calculated?
The investment multiplier can be calculated using the following formula: 1/(1-Marginal Propensity to Consume, MPC). The investment multiplier is determined by the percentage of income that individuals or businesses spend (MPC) versus save (Marginal Propensity to Save, MPS), with a higher investment multiplier suggesting a larger stimulative effect on the economy.
Who introduced the concept of the investment multiplier?
John Maynard Keynes was among the first economists to introduce the investment multiplier in his theories explaining how governments could use this tool for economic growth through spending.
What are some real-world examples of the investment multiplier?
An example is a public infrastructure project, such as building a new highway: the construction workers employed receive income from their wages, which they can then spend on goods and services in various industries. The subsequent increase in demand boosts employment, income, and economic activity throughout the economy.
What are the advantages of using the investment multiplier?
The investment multiplier is an effective tool to evaluate the long-term impact of investments and provides a clear understanding of how economic stimulus can ripple through the economy by creating jobs and increasing overall economic activity.
What are some limitations of using the investment multiplier?
The investment multiplier assumes constant MPC, which may not always be the case as spending habits can change over time; moreover, it does not account for the distribution of income and wealth.
What is the difference between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS)?
Marginal Propensity to Consume (MPC) represents the percentage of additional income that a household or business spends, while Marginal Propensity to Save (MPS) represents the percentage of additional income that is saved. In aggregate, MPC + MPS = 1.
What are some other multipliers used in economics and finance?
Some other multipliers commonly used include fiscal multiplier, earnings multiplier, and equity multiplier. Each multiplier measures the impact of a change in an economic variable on another economic variable.