What is the multiplier effect in the economy

Multiplier effect

Multiplier principle

In economic theory, the quantity with which the effects of additional expenditure by the state, private households or abroad as well as increased investment expenditure by companies on national income are measured. In principle, a multiplication effect (multiplicative effect) can be determined.

As a result of increasing investments by companies, new jobs and thus new income are created in private households, which then spend part of their additional income, which in turn creates additional income. The increase in income is many times higher than the amount of money originally used for the investment. If an investment of € 1 billion leads to newly generated income of € 3 billion, the investment multiplier is 3. The multiplication effect is greater the more income is spent on consumption and the less income is saved. The same multiplication effect applies to increasing consumer spending by private households, to increasing exports (export multiplier) and higher government expenditure (government expenditure multiplier).

This has meaning Multiplier principle above all for the description of the economic development, for the growth of the economy and for the decision about the use of the economic policy means of the state.

Duden Wirtschaft from A to Z: Basic knowledge for school and study, work and everyday life. 6th edition. Mannheim: Bibliographisches Institut 2016. Licensed edition Bonn: Federal Agency for Civic Education 2016.