In Economics the ‘Multiplier'(k) is used to determine the effect of ‘Government Spending'(G) on ‘National Income'(NY).
There are two main methods of calculating the Multiplier:
Marginal propensity to consume (mPC)- This is the average proportion of additional income people are likely to consume.
Marginal propensity to Withdraw (mPW)- This is the average proportion of additional income people are likely to Withdraw.
The mPW can be linked to the circular flow and split up into three sections:
-mPS- Save (To financial institutions)
-mPT- Tax (To the Government)
-mPM- Import (To the Foreign sector)
The multiplier is very useful to the government as it will enable them to calculate the effectiveness of extra spending on NY. It also enables governments to make decisions on when spending should be increased and decreased.
The exact value of the multiplier is very hard to calculate as changes in spending patterns can be sudden and hard to predict. Due to these uncertainties it is hard to truly know the outcome of government taxation and spending.