# Spending Multiplier Calculator

## What is the spending multiplier?

The spending multiplier is an expectation of how much economic activity an investment will make.

As an example, marginal propensity to consume = 0.6. The spending multiplier is therefore equal to 2.5. A company spends \$1 million to build a restaurant in a town. That \$1 million will go to pay for contractors and building materials and subtrades. The spending multiplier would show that of that \$1 million would generate 2.5 times that (\$2.5 million) in economic activity as all the contractors and subtrades would spend a certain proportion of their income on building materials and hiring extra labor. Those purchases would then go on to spend more in the economy through other purchases. In total, far more economic activity in the economy is produced than the initial investment.

## Formula

Save – Spending Multiplier = 1 / Marginal Propensity to Save

Consume – Spending Multiplier = 1 / (1 – Marginal Propensity to Consume)

## Example

Save – Marginal Propensity to Save is 19% (0.19 as a decimal)

Spending Multiplier = 1 / 0.19 = 5.26

Consume – Margin Propensity to Consume is 55% (0.55 as a decimal)

Spending Multiplier = 1 / (1 – 0.55) = 1 / 0.45 = 2.22