TOPIC INFO (UGC NET)
TOPIC INFO – UGC NET (Economics)
SUB-TOPIC INFO – Macro Economics (UNIT 2)
CONTENT TYPE – Detailed Notes
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1. Introduction
2. The Concept of Multiplier
2.1. Origin and Meaning
2.2. The Working Mechanism of the Multiplier
2.3. Numerical Illustration
2.4. Assumptions of the Multiplier
2.5. Leakages in the Multiplier Process
2.6. Types of Multipliers
3. The Concept of Accelerator
3.1. Origin and Meaning
3.2. The Accelerator Coefficient
3.3. Working Mechanism of the Accelerator
3.4. Distinction Between Types of Investment
3.5. Assumptions of the Accelerator
3.6. Limitations of the Accelerator
4. Interaction of Multiplier and Accelerator: The Trade Cycle Model
4.1. The Logic of Interaction
4.2. Hicks’s Theory of the Trade Cycle
4.3. Samuelson’s Multiplier-Accelerator Model
5. Comparative Analysis of Multiplier and Accelerator
6. Significance and Policy Relevance
7. Conclusion
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Multiplier and Accelerator
UGC NET ECONOMICS
Macro Economics (UNIT 2)
Introduction
The theories of multiplier and accelerator occupy a central place in Keynesian macroeconomics and business cycle theory. Both concepts explain how small initial changes in economic variables — particularly investment and income — can generate much larger and often cumulative changes in the overall level of economic activity. While the multiplier explains how a change in investment or autonomous expenditure leads to a magnified change in national income, the accelerator explains how a change in income or output induces a magnified change in investment. Together, these two concepts form the basis of the Multiplier-Accelerator Interaction Model, which is widely used to explain the trade cycle or business cycle phenomena.
The Concept of Multiplier
Origin and Meaning
The concept of the investment multiplier was first introduced by R.F. Kahn in 1931 in his article on the “employment multiplier,” and it was later developed and popularized by J.M. Keynes in his celebrated work “The General Theory of Employment, Interest and Money” (1936). Keynes used the multiplier to demonstrate how an initial increase in investment expenditure could lead to a much larger increase in aggregate income and employment.
The multiplier may be defined as the numerical coefficient which shows how many times the increase in income is greater than the increase in investment that caused it. In simple words, the multiplier measures the ratio of change in income (ΔY) to the change in investment (ΔI) that brought it about.
Symbolically:
K = ΔY / ΔI
where K represents the value of the multiplier, ΔY is the change in income, and ΔI is the change in investment.
The Working Mechanism of the Multiplier
The multiplier works through the process of successive rounds of spending. When there is an initial increase in investment expenditure — say, in building a factory — this creates income for workers, suppliers, and other factors of production involved in that investment. This newly created income is not entirely saved; a part of it is spent on consumption, which becomes income for others, who in turn spend a part of it again. This process continues through several rounds, with each round of spending becoming smaller than the previous one, ultimately leading to a total increase in income that is a multiple of the initial investment.
This chain reaction depends critically on the Marginal Propensity to Consume (MPC), which is the proportion of an additional unit of income that is spent on consumption. The relationship between the multiplier and MPC is expressed as:
K = 1 / (1 – MPC)
Since MPC + MPS = 1 (where MPS is the Marginal Propensity to Save), the multiplier can also be written as:
K = 1 / MPS
This formula shows an important relationship: the higher the MPC (or the lower the MPS), the larger the value of the multiplier, and conversely, the lower the MPC, the smaller the multiplier.