The multiplier effect financially shows that significant injections into the economy of money multiply in the process of their circulation in the economy of the state. Despite the fact that large foreign investments or significant government expenditures represent additional government revenue, which is equal to its initial cost, other sectors of the economy will be stimulated with its help.
Thanks to the initial investment, financing is provided for the costs of purchasing goods and direct pay, which leads to the creation of a significant number of jobs in the supply sector, and this allows increasing demand for services and goods in general. And shareholders and workers will benefit from this chain reaction, which was caused by initial investments, demand will continue to grow, salaries will rise, which will positively affect profits. The end result of all this will be a positive impact on the consumer market. It is likely that the most powerful multiplier effect will be shown by investments in construction. Usually they have a stronger effect, affecting the entire economy in general. However, it can also experience a bad multiplier effect, when significant amounts are withdrawn from it with a significant reduction in government spending, for example, when a large project that is related to infrastructure development is canceled. In such conditions, a significant recession in the economy is obtained.
Animator theory
It is worth saying that in the general case, the multiplier is understood as the ratio of changes in income to a change in the component of autonomous expenses. Its essence is that national income increases with an increase in any of the components of autonomous expenses. The action of the multiplier in this case is as follows. For example, the initial investment in the construction of residential buildings is one thousand dollars. All owners of factors of production who provided resources for the organization of construction will receive a certain income. Builders will show part of their earnings in the form of demand in the consumer goods market, while the second part is saved by workers. It turns out that other business agents cash income will increase. Other business agents will spend part of this income on the purchase of consumer goods, the second part will be spent on savings.
This process is gradually capturing more and more layers of the population who will present their income in the market of consumer goods in the form of demand. It turns out that the initial thousand dollars will cause a growth in income and aggregate demand by a certain amount in excess of $ 1,000. The multiplier effect in its size depends on the propensity to consume and save.
In economic theory, it is customary to distinguish several types of multiplier:
- multiplier of government spending;
- tax multiplier;
- multiplier of foreign trade.
If the population continues to invest in the country's economy, then it will be acquired not only additional income, but also additional goods presented on the domestic market. Increased investment in the domestic economy can significantly increase the number of jobs, which solves a whole set of social problems. The negative effect is obtained due to the high propensity of the population to save. In Russia, this situation has arisen due to the fact that the population does not trust commercial structures that allow investments. That is why it is necessary to stimulate investment activity at the state level, so that a significant economic effect can be achieved .