NOTESPB/

MACRO/
SEMESTERI
I

LEAKAGESOFMULTI
PLI
ERPROCESS

Ther
ear evari
ousl
eakagesini ncomegener
ati
onprocesswhichreducet
hesi
zeof
mult
ipl
i
er.Thefi
vemaj
orleakagewi t
hmul
ti
pli
erpr
ocessareasf
oll
ows:

1.Repay
mentofdebt
sand/
orpur
chaseofol
dst
ocks/
shar
es

Thefirstl
eakagei nthemul ti
pli
erprocessoccur sinthef orm ofpaymentofdebtsbyt he
people,especial
lybybusi nessmen.I ntherealwor l
d,allincomer ecei
vedbythepeopl e
asar esultofsomei ncr
easei ni
nvestmenti snotconsumed.I fpeopleuseapar tofthe
i
ncrementofi ncomet orepayold-bankdebt s,theni nsteadofspendi ngitf
orf urt
her
consumpt ion,t
hatpar tofincomedi sappearsfr
om t heincomest ream.Also,I
fapar tof
thenewl y-ear
nedi ncomei sspentonbuy i
ngol dst ocks,sharesandsecur i
ti
esoron
fi
nancialinvestments,consumpt i
onwi llbelessandcor respondingl
ythemultipl
ierwil
l
belower .

Thust hepartoft heincrementi

ni ncomeisusedforpayi
ngbackthedebt swhicht
he
peoplehav etakenf rom moneylenders,banksorotherf
inanci
ali
nsti
tut
ionsandthe
i
ncomesusedf orpay i
ngbackt hedebt sdonotgetspentonconsumergoodsand
serv
icesandt herefor
el eakawayfrom theincomest
ream.Thisr
educesthesizeoft
he
multi
plier
.

2.Hol
dingofi
dlecashbal
ances:

Ifthepeopleholdapar toftheiri
ncrementalincomeasi dl
ecashbalancesanddonot
uset hem f
orconsumpt i
on,t
heyal soconstit
uteleakageinthemulti
pli
erprocess.Aswe
hav eseen,peoplekeepapar toft heiri
ncomef orsat
isfy
ingthei
rprecautionar
yand
speculati
vemot i
ves,moneykeptf orsuchpur posesisnotconsumedandt heref
ore
doesnotappeari nt hesuccessiver oundsofconsumpt ionexpendi
tureandt heref
ore
reducestheincr
ementint ot
alin¬comeandout put.

3.NetI
mpor
ts:

Inouraboveanal y
sisofthewor kingoft hemult
ipl
ierprocesswehav etakenthe
exampleofaclosedeconomy,t
hatis,aneconomywithnoforeignt
rade.Ifi
tisanopen
economyasisusuall
ythecase,
thenapar tofi
ncr
ementinincomewi l
lalsobespenton
theimpor
tsofconsumergoods.

Thepr oport
ionofincrementsinincomespentontheimportsofconsumergoodswi l
l
gener¬ateincomei nothercount
riesandwil
lnothel
pinraisi
ngincomeandout putin
thedomest iceconomy .Ther
efor
e,impor
tsconst
it
uteanot
herimportantl
eakageinthe
multi
plierpr
ocess.

4.Taxat
ion:
 NOTESPB/
MACRO/
SEMESTERI
I

Taxat
ionisanotherimportantleakagei
nt hemul
ti
pli
erpr
ocess.Thei
ncr
ementsi
n
i
ncomewhi chthepeoplerecei
veasar esul
tofi
ncr
easeini
nvest
mentar
ealsoi
npar
t
usedforpay¬mentoft
axes.

Ther efor
e,themoneyusedf orpaymentoftaxesdoesnotappeari nt hesuccessive
roundsofconsumpt ionexpendit
ureinthemult
ipli
erpr ocess,andthereforemulti
pli
eris
reducedt othatextent.Howev er,i
fthemoneyr aisedt hr
ought axati
oni sspentbyt he
Gov ernment,theleakagethroughtaxatonwi
i l
lbeof f
setbyt heincreaseinGov er
nment
expendi t
urethroughthegovt.expendi
turemul
ti
plierprocess.

Butitisnotnecessaryt hatallthemoneyr aisedt

hrought axati
oni sspentbyt he
GovernmentasithappenswhenGov ernmentt akesasurplusbudget .Nodoubt,i
ft he
Governmentexpendi
tur
ei ncreasesbyanamountequalt ot het axat
ion,i
twouldnot
hav
eanyadv erseeff
ectont heincreaseinincomeandi nvestmentandi nthiswaythere
wouldbenoleakageinthemul ti
pli
erprocess.

5.I
nfl
ati
on:

I
nfl
ationconstit
utesanotherimpor
tantl
eakageintheworki
ngoft hemulti
pli
erpr
ocess
i
nrealterms.Aswehav enotedabove,t
hemulti
pli
erworksi
nr ealt
ermsonlywhenasa
r
esultofincreaseinmoneyi ncomeandaggregatedemand,outputofconsumergoods
i
salsoincreased.

Whenoutputofconsumergoodshasnotincreased,apartoft
heincr
easei
nthemoney
i
ncomeandaggr egatedemandr ai
sespricesoft hegoodsr at
herthant
heirout
put
.
Ther
efor
e,themult
ipl
ieri
sreducedt
otheextentofpricei
nfl
ati
on.

(I
ndev elopi
ngcountriesli
keIndiatheextrai ncomesanddemandar emostlyspenton
foodgr ainswhoseout putcannotbei ncreasedeasil
y.Ther
efore,theincrementsin
demandr ai
set
hepr icesofgoodst oagr eaterextentt
hantheincreaseinthei
routput
.
Besides,indev
elopingcount r
iesli
keIndia,thereisnotmuchexcesscapaci t
yinmany
consumergoodsi ndustri
es,especi
all
yinagr i
cultur
eandot
herwage- goodsi
ndustri
es.
)

Therefore,whenincomeanddemandincr
easeasar esul
tofincr
easeininv
estment,i
t
generall
yr ai
sest hepri
cesofthesegoodsratherthan t
heiroutputand t
her
efore
weakenst heworkingoft
hemult
ipl
i
erinr
ealt
erms.

Theabov evariousleakagesreducethemul t
ipl
iereff
ectoftheinvestmentundertaken.
Tot heextentt hatitoperat
es,themult
ipli
eref f
ectofnew investmentwillnotbeas
cal
culat
edbyKey nes’for
mula.However,iftheseleakagesareplugged,theeffectof
changeininvestmentoni ncomeandempl oymentwoul dbegreater
.