The circular flow and the multiplier
| English | Chinese | Pinyin |
|---|---|---|
| injection | 注入 | zhù rù |
| multiplier | 乘数 | chéng shù |
| national income | 国民收入 | guó mín shōu rù |
| withdrawals | 漏出 | lòu chū |
| marginal propensity to consume | 边际消费倾向 | biān jì xiāo fèi qīng xiàng |
How one dollar becomes many
- Spend a dollar at a shop; the shopkeeper spends part of it; the next person spends part of that. One injection 注入 ripples through the economy.
- This multiplier 乘数 effect means a change in spending raises national income 国民收入 by more than the original amount.
The circular flow, revisited
- Income circulates between households and firms, with injections (I, G, X) adding in and withdrawals 漏出 (S, T, M) leaking out.
Injections (investment, government spending, exports) feed the loop; withdrawals (saving, taxes, imports) drain it.
Income circulates between households and firms, with injections and leakages
The circular flow and the multiplier
Income circles between households and firms. An injection (e.g. investment) is re-spent again and again — the multiplier effect.
Which is an injection into the circular flow?
Injections are I, G, X; saving, taxes and imports are withdrawals.
The multiplier
- Each round of re-spending depends on the marginal propensity to consume 边际消费倾向 (MPC):
Worked example. If MPC = 0.75, the multiplier $= \dfrac{1}{1 - 0.75} = \dfrac{1}{0.25} = 4$ — so £1bn of extra spending raises national income by £4bn.
One injection multiplies into a larger rise in income
The multiplier, round by round
Drag the injection and the MPC, then press Play — each spending round is MPC times the last, and the total settles at k × the injection. Bigger leaks, smaller ripple.
If the marginal propensity to consume is 0.75, what is the multiplier = 1/(1 − MPC)?
1 / (1 − 0.75) = 1 / 0.25 = 4.
With a multiplier of 4, by how much does national income rise if spending increases by 2 billion?
4 × 2 billion = 8 billion.
The multiplier equals 1 / (1 − ______).
Multiplier = 1/(1 − MPC).
What weakens the multiplier
- The bigger the withdrawals (high saving, taxes, or import spending), the smaller the multiplier — more leaks out each round.
Actual output around its potential, showing output gaps
A higher rate of saving or imports reduces the size of the multiplier.
More leaks out of the flow each round, so re-spending — and the multiplier — is smaller.
You've got it
- an injection ripples through re-spending — the multiplier effect
- multiplier $= \dfrac{1}{1 - MPC}$ (MPC 0.75 → multiplier 4)
- bigger withdrawals (saving, tax, imports) → smaller multiplier