Investment: investment multiplier. Investment multiplier effect

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Consumption is the most important component of society's total spending. This concept is understood as the costs of the population, which are aimed at purchasing goods and services for final consumption. There are many factors that affect consumer spending. One of these is investment. The investment multiplier is a coefficient that shows the change in gross product along with them.

The first multiplier formulas

Keynes connected the explanation of the marginal propensity to consume with the multiplier theory. His idea was created by Professor R. Kahn in 1931. He believed that costs (for example, for the organization of public works) become the beginning for the creation of "primary" employment, and also cause the purchasing power of workers and companies that are involved in the implementation of this activity. They form a new demand, which becomes a source of "secondary" employment.

In this case, new spending will take only part of the income of workers or companies, and the remaining funds will be used to pay debts or set aside. According to Kahn,the multiplier depends on the amount of money spent at each new stage. Thus, the investment multiplier was created, the formula: K \u003d 1 / (1 - K). This idea was developed by Keynes. Its multiplier showed the dependence of the national income on attracted investments - (К=DY/DI). It was introduced as a value that depends on the increased propensity to consume. If we consider that Y is national income, I is investment, C is consumption, and is the propensity to consume, then the formula will be: DY=DC + DI; DY=a x DY + DI; DC=DY x a; DY=DI (1 - a); DY / DI \u003d 1 / (1 - a) u003d K > 1, if 0 < a < 1; K is the investment multiplier.

Investment multiplier effect

The increase and decrease in income will be more significant if the changes are caused by investment. This result can be encountered by considering a numerical example. Suppose, initially, the volume of investments (I0) is equal to 100 (billion rubles), and the consumption function is presented in the following formula: С=20 + 0.6 x Y. In the ordinary state, the equation looks like this: Y0=20 + 0, 6Y x 0 + 100. That is, Y0=300 (billion rubles).

If the amount of the initial deposit increases to 140 (I1), the equation will be as follows Y1=20 + 0.6 x Y1 + 140. Hence Y1=400 (billion rubles). It can be concluded that their growth by 40 billion rubles. led to an increase in income by 100 billion rubles. This phenomenon is called the investment multiplier effect.

Investment: investment multiplier

One of the components of total spending isinvestments. They are most often understood as contributions to the increase in the real capital of society. Most often they are long-term investments. The degree of net expenditure on them depends on two main factors. The first is the expected rate of net profit that should be received by entrepreneurs from expenses. The second factor is the interest rate.

Entrepreneurs producing investment goods will receive more income in the event of an initial increase in investment. When studying the indicators, it will not be difficult to determine the multiplier.

Expected net profit margin

Profit is the motive for spending on investments. That is, the entrepreneur will make purchases only if they are expected to be profitable. You can consider a specific example. The owner of a furniture workshop wants to invest in a new grinding machine. Its cost will be 2000 rubles, and the service life is 1 year. The production of the workshop should be increased, and, consequently, the revenue. We can assume that the net expected income is 2500, that is, the investment multiplier is 2.5.

Real interest rate

Another cost component is associated with investing. This is the rate of interest, that is, the price that an entrepreneur will pay to borrow the money required to buy a grinding machine. The investment will become profitable if the rate of interest is less than the expected rate of net return. It should be noted that a significant roleplays not the nominal, but the real interest rate.

Change in national income

By increasing investment, the investment multiplier will show the change in national income per unit. Keynes calculated that this indicator is 2.5 for the US and UK economies. The effect of a one-time investment will continue until the technological innovation associated with it is exhausted. For this reason, long-term investments are more profitable. If 0 < D < 1, the multiplier will exceed 1, which means that their single increase will lead to an increase in state income.

Changes in profits will not be caused by savings, but by investments. Keynes showed how savings are created to achieve the required level of investment. This procedure is carried out by means of multipliers. The scientist attributed all the costs of the entrepreneur for the purchase of equipment to productive costs. In this case, it is necessary to calculate the ideal efficiency of capital, as well as calculate the profit. The structure of investments is of no small importance in this case. This is due to the fact that the entrepreneur hopes to make a profit from his capital for a long time.

The rate of interest and its impact on investment

Keynes decides the ratio of profits and wages in favor of the first. The producer can use liquid funds productively if the rate of interest is less than the rate of return expected frominvestment. The scientist defines the rate of interest as the payment made for parting with liquidity. In his opinion, it depends on the subjective assessment of the current and future economic condition. In this case, investment will become more accessible, as the supply of capital will increase in liquid form.

At the same time, the issuance of money will cause prices to rise and reduce the increase in liquidity, as their purchasing power will become less. The demand for money can become limitless at a sufficiently low interest rate. Keynes denies that the structure of investment can change under the influence of the rate of interest, which is also not capable of changing the investment plans of entrepreneurs in general.

The Keynesian school studies investment, the investment multiplier, and also creates practical recommendations. On their basis, social programs were created that received funding from the budget, measures were taken to organize major public works, etc. The investment multiplier allows you to maintain effective demand in the event of a crisis in the economy, and also has a positive impact on the economic situation as a whole.