Spending Multiplier Calculator (Save)
Spending Multiplier Calculator (Consume)
Definition – 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 – How to calculate the spending multiplier
Save – Spending Multiplier = 1 / Marginal Propensity to Save
Consume – Spending Multiplier = 1 / (1 – Marginal Propensity to Consume)
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
Sources and more resources
- Khan Academy – MPC and multiplier – Part of a larger macroeconomics course. A video covering the multiplier effect.
- ACDC Leadership (YouTube) – Macro 3.10 – Calculating the Spending Multiplier – An overview video on the spending multiplier and how it is calculated.
- Investopedia – The Multiplier Effect – An explanation of the multiplier effect in regards to Macroeconomics.
- The Intelligent Economist – The Multiplier Effect – Explains the multiplier effect as well as some more complex approaches.
- BYU Idaho – Econ 151 Economic Principles and Problems – Macro – The Aggregate Expenditures Model – Explaining the aggregate expenditures model and the spending multiplier.
- Jason Welker – The Economics Classroom – Glossary – Spending Multiplier – A very quick entry on the spending multiplier.
- UBC Wiki – Keynesian Multiplier – Some algebra in regards to multipliers.