What Is an Investment Multiplier?

The investment multiplier refers to the multiple of the increase in national income that may be brought by the increase in investment when the government uses fiscal policy to bring national income to equilibrium. The investment multiplier can be expressed as the ratio of the income variable to the investment variable. The increase in investment has a multiplier effect because economic sectors are interconnected. An investment in a certain sector will not only increase the income of the sector, but also cause a chain reaction in various sectors of the national economy, thereby increasing Investment and income from other sectors eventually doubled national income. ^[1]

Investment multiplier

Investment multiplier : refers to the ratio of changes in income to changes in investment expenditures that bring about such changes ^[2]

Keynes proposed

All economic theories are based on certain assumptions, so the application of the theory must also be limited to a certain range. Built for analysis

According to the general understanding of the investment multiplier theory, it is believed that expanding consumption can increase national income. This is extremely harmful. It can only lead to errors in the guiding ideology, leading people to the misguided emphasis on consumption, light production, and blind promotion of high consumption. In fact, the object of consumptionconsumer goods are provided by production. Only through production can national income be created. Consumption cannot directly produce even a small amount of national income; consumption can only provide an appropriate economy for the creation of national income. The environment affects the creation of national income. The main vision of increasing national income should be in the field of production and construction. If we only look at the consumer sector, it will be putting the cart before the horse. As a result, the national economy will only suffer losses.

When the supply and demand are balanced before the investment, the social inventory is brought by the current investment. There are three possible relationships between the sales income Y caused by the investment and the national income brought by the investment. Only the sales income Y caused by the investment and the investment through production activities When the national income with a bid value of Y is synchronized in time, the sales income generated by the investment can be used to represent the national income from the investment. However, considering the long-term nature of fixed asset investment, I creates a Y national income time. It takes longer than I to generate Y's sales revenue. The third possibility generally does not occur. The first possibility is only the goal of the effort, and usually only the second possibility occurs. Then, the second possibility should be transformed into the first possibility, and national income should be increased according to the investment multiplier. The only way is to shorten the time for I investment to create national income with a bid value of Y through productive activities, that is, to increase labor productivity. Therefore, it can be concluded that supply and demand are balanced before investment, and social inventory is created by new investment.