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PERFECT COMPETITION, LONG-RUN ADJUSTMENT: A perfectly competitive industry undertakes a two-part adjustment to equilibrium in the long run. One is the adjustment of each perfectly competitive firm to the appropriate factory size that maximizes long-run profit. The other is the entry of firms into the industry or exit of firms out of the industry, to eliminate economic profit or economic loss. The end result of this long-run adjustment is a multi-faceted equilibrium condition that price is equal to marginal cost and average cost (both short run and long run).

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EXPENDITURES MULTIPLIER:

A measure of the change in aggregate production caused by changes in an autonomous expenditure. The expenditures multiplier is the inverse of one minus the slope of the aggregate expenditures line. The simple expenditures multiplier includes ONLY induced consumption. More complex expenditures multipliers include other induced components. Two related multipliers are the tax multiplier, which measures the change in aggregate production caused by changes in taxes, and the balanced-budget multiplier which measures the change in aggregate production from equal changes in both taxes and government purchases.
The expenditures multiplier measures the change in aggregate production triggered by changes an autonomous expenditure, including consumption expenditures, investment expenditures, government purchases, or net exports. The expenditures multiplier captures the consequences of a shift in the aggregate expenditures line in a single measure, a measure that is generally greater than one.

The expenditures multiplier is actually a family of multipliers that differ based on which components of the Keynesian model are assumed to be induced by aggregate production and income. The simple expenditures multiplier, as the name suggestions, is the simplest variation and includes only induced consumption. Every other component -- investment expenditures, government purchases, taxes, exports, and imports -- are assumed to be autonomous.

More complex expenditures multipliers include different combinations of induced components, ranging all of the way up to the "complete" expenditures multiplier that realistically includes all induced components. Induced consumption, investment, and government purchases all increase the value of the expenditures multiplier. Induced taxes and imports both decrease the value of the expenditures multiplier.

The Simple Expenditures Multiplier

The simple expenditures multiplier is the ratio of the change in aggregate production to an autonomous change in an aggregate expenditure when consumption is the only induced expenditure. This multiplier is as simple as it gets while capturing the fundamentals of the multiplier. Autonomous investment triggers the multiplier process and induced consumption provides the cumulatively reinforcing interaction between consumption, aggregate production, factor payments, and income.

The formula for this simple expenditures multiplier, m, is:

m = 1
(1 - MPC)
= 1
MPS
Where MPC is the marginal propensity to consume and MPS is the marginal propensity to save.

If, for example, the MPC is 0.75 (and the MPS is 0.25), then an autonomous $1 trillion change in investment expenditures results in a change in aggregate production of $4 trillion.

While the simple expenditures multiplier can be derived from the basic two-sector Keynesian multiplier, it also works for models with more sectors, as long as consumption is the only induced expenditure. If, for example, autonomous government purchases change by $1 trillion, then the change in aggregate production is $4 trillion, the same as with a $1 trillion change in investment expenditures. Moreover, the same change in aggregate production is realized if autonomous exports or consumption expenditures change by $1 trillion.

More Complex Expenditures Multipliers

The simple expenditures multiplier assumes that consumption is the only induced component. In the real world, however, consumption is not the only induced expenditure. Investment, government purchases, taxes, and net exports (through imports) are also induced. A more complete, more realistic, and more complex multiplier includes induced components.

Here is the formula for just such a multiplier, which can be labeled m[all].

m[all] = 1
{1 - [MPC + MPI + MPG - (MPC x MPT) - MPM]}
This particular multiplier has a number of abbreviations containing the letters "MP." These are the assorted induced components, with "MP" standing for marginal propensity. In fact, the batch of abbreviations within the brackets "[]" is actually the slope of the aggregate expenditures line.

Let's run through the cast of characters in this formula.

This complex expenditures multiplier can be used to determine the change in aggregate production resulting from a change in any autonomous expenditure, including consumption, investment, government purchases, and net exports.

This particular expenditures multiplier formulation includes all induced components. However, several other expenditures multipliers that include different combinations of these induced components can be identified. One multiplier can include only induced consumption and induced government purchases. Another can include induced consumption, induced investment, and induced imports. The possibilities are almost endless.

Other Multipliers

The expenditures multiplier is one of several Keynesian multipliers. Two other related multipliers are tax multiplier and balanced-budget multiplier.
  • Tax Multiplier: The tax multiplier measures changes in aggregate production caused by changes in taxes. Like the expenditures multiplier this comes in several varieties, simple and complex, depending on which expenditures and other components are induced by aggregate production and income. It differs from the expenditures multiplier in that aggregate expenditures change by less than the change in taxes.

  • Balanced-Budget Multiplier: The balanced-budget multiplier measures the combined impact on aggregate production of equal changes in government purchases and taxes. The balanced-budget multiplier has a value equal to one.
Two other multipliers arise from the financial, or money, side of the economy. They are the deposit expansion multiplier and the money multiplier. The deposit expansion multiplier measures the change in bank deposits caused by a change in bank reserves. The money multiplier measures the change in money caused by a change in bank reserves. Both are useful in the analysis of monetary policy.

<= EXPANSIONARY MONETARY POLICYEXPLICIT COLLUSION =>


Recommended Citation:

EXPENDITURES MULTIPLIER, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2015. [Accessed: February 1, 2015].


Check Out These Related Terms...

     | simple expenditures multiplier | tax multiplier | simple tax multiplier | balanced-budget multiplier | multiplier | multiplier principle | multiplier, Keynesian cross | multiplier, slope of aggregate expenditures line | multiplier, injections-leakages model |


Or For A Little Background...

     | Keynesian economics | Keynesian model | Keynesian cross | circular flow | aggregate expenditures | induced expenditures | autonomous expenditures | consumption function | marginal propensity to consume | marginal propensity to save | marginal propensity to invest | marginal propensity for government purchases | marginal propensity to import | aggregate expenditures determinants |


And For Further Study...

     | multiplier, aggregate market | paradox of thrift | money multiplier | fiscal policy |


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