Expert reviewed • 04 March 2025 • 5 minute read
Expert reviewed • 04 March 2025 • 5 minute read
In the study of economic growth, the simple multiplier measures the change in aggregate output (GDP) resulting from an initial change in spending (usually government spending or investment). The simple multiplier effect explains how initial spending can lead to a greater overall increase in economic activity.
The simple multiplier is represented by the formula:
Where:
The simple multiplier demonstrates how an initial change in spending can lead to a larger change in national income. Here's a step-by-step explanation:
These steps therefore validate the following formula:
Where,
Suppose the Australian government decides to increase infrastructure spending by $10 billion. According to the Australian Bureau of Statistics, the average MPC in Australia is approximately 0.75 (meaning 75% of additional income is spent). Using this information, what could be the potential increase in national income?
Using the simple multiplier formula:
This means that the $10 billion increase in government spending could potentially lead to a total increase in national income of: