What is a multiplier? This word, like many others in the Russian language, has many interpretations. In most cases, it is understood as an object that contributes to the multiple increase of another object.
Multiplier Concept
Consider what a multiplier is, from the perspective of various dictionaries.
From an economic point of view, this term is a multiplying factor.
In the dictionary of the Great Russian language V. Dahl, it is understood as the arithmetic mean of the height of the star.
D. N. Ushakova can meet three definitions of this concept:
a device for measuring a very weak current using a magnetic needle;
a camera with several lenses, with the help of which several images of one object are simultaneously obtained;
animation worker.
S. I. Ozhegov, N. Yu. Shvedova in their explanatory dictionary give two definitions of what the multiplier is:
T. F. Efremova has four definitions of this concept, the last of which also applies to workers in the production of animated films, and the first three are some devices:
used to increase the speed of a certain shaft of the mechanism;
in order to increase the pressure of the liquid body;
in order to obtain multiple identical pictures when printing or photographing.
The 1998 Encyclopedic Dictionary provides three similar definitions plus an economic definition, and here, by the multiplier, we mean the device with which color printing samples are obtained simultaneously.
In our article, we will consider the multiplier from an economic point of view.
From the history
This concept was first formulated by an economist from Great Britain R.F. Kahn in the early 30s of the last century. He believed that as a result of government spending on public works, primary employment appears, which then gives rise to secondary, tertiary and other types of it. This contributes to the multiplier effect of the latter, as well as the purchasing power caused by the initial costs.
Later, Keynes added the concept of the latter with respect to income or investment to the employment multiplier. It shows the ratio of the growth of the former to the latter.
The multiplier of J. Keynes
He belongs to merit in the generalization of the concept under consideration in the economy. Investment growth provides a directly proportional increase in income, some of which will be spent on the purchase of certain goods necessary for life. Manufacturers of the latter will receive income, some of which will also be spent.
As a result, a positive growing effect of investments, which is called multiplying, will be observed on the scale of GDP. It is determined by how much society is ready to leave for consumption, and how much to save for savings.
An economy participating in international trade has a penchant for savings, imports, and taxation. In this case, the value of the investment multiplier will be less.
Keynes said that this coefficient has a positive effect on all sectors of the economy. He proposed to regulate not only investments, but also ND. For this, he considered it necessary to raise taxes, which would contribute to the withdrawal of savings and, as a consequence, the growth of public investment.
Later, Keynesians from America supplemented the concept of the multiplier with the accelerator principle, since they began to consider it as a continuous process.
Payment
The growth of income in society is determined by the ratio of those parts that go to consumption, called the marginal propensity to consume (mpc) and put aside for savings, named similarly for saving (mpw).
The multiplicative effect on the increase in NI (∆N) is equal to the product of the Keynes coefficient (multiplier (K)) and the increase in investment (∆K). The considered value itself is calculated by the multiplier formula shown in the figure.
Multipliers in Macro and Microeconomics
When analyzing the interindustry balance , a matrix coefficient is used, with the help of which the connection of the final industry products with EP is carried out with a known share of the latter used within the industry.
The forecast of the dynamics of total income, employment in the region due to the growth of any component of total expenses is carried out using the regional multiplier.
The impact of changes in the basic industries of an entity on its economy as a whole is assessed by the considered coefficient of the economic base, which reflects the growth in the number of employees over a long period of time due to it in these industries.
What effect does the growth of budget costs have on the equilibrium level of income, the multiplier of budget spending shows.
The ratio of incomes that the population actually has to the dynamics of government spending when changing recent and tax revenues by the same amount, refers to the considered ratio of the balanced budget.
Cost multiplier
The multipliers of government and autonomous expenditures are such coefficients. The latter will be discussed below.
Government costs affect employment and national production. They have the same effect on aggregate demand as investments and consumer costs. They are characterized by a multiplicative effect, which is expressed in the generation of ever new stages of the last and multiplying effect of investments.
The magnitude of the multiplier in this case is calculated as the ratio of the increment of GNP to it in relation to government costs.
Its assessment can be carried out through the marginal propensity to consume. In this case, the multiplier is equal to the ratio of 1 to the difference between 1 and mcp.
Thus, with the observed dynamics of government spending, a change in income is observed, which is proportionally dependent on the former.
The multiplier of government spending is equal to that in relation to investment.
Taxes also have a multiplier effect. However, it is not as strong as investment or government spending. This is due to the fact that taxes are part of government spending, and part cannot be more than the whole. The tax multiplier is calculated as the ratio of mcp to the difference of 1 and mcp. This is due to the fact that with tax cuts, some go to consumption, while others go to savings.
Standalone Cost Multiplier
Its essence boils down to the fact that an increase in any component of this multiplier leads to an increase in the ND of society, and this value exceeds the initial increase in costs. This can be compared to a stone thrown into water. It causes a chain reaction in the form of circles. In the same way, autonomous expenses contribute to the growth of employment and income.
This multiplier shows how equilibrium income will increase in the event of an increase in autonomous demand.
The mechanism of action and the calculation of the autonomous coefficient
The additional costs of some individuals become an additional source of income for others. The latter are the sellers of goods and services. The income received by them at the next round of turnover becomes their expense, which contributes to an increase in aggregate demand for products.
The calculation of the autonomous multiplier is carried out by the ratio of 1 to the expression (1 - mpc - marginal propensity to invest + the same with respect to imports). When accounting for taxes in the denominator, mpc needs to be multiplied by the difference between 1 and the level of taxes with respect to ND.
Autonomous expenses include investments, government spending, and net exports. The effect of the multiplier is clearly demonstrated with the help of the "Caseian Cross", shown in Figure 3 of the section.
The growth of any of the autonomous costs leads to a shift of the equilibrium point up and to the right, while income grows faster compared to autonomous costs.
Key multipliers when comparing companies
Using the coefficients in question, you can compare various legal entities. This is done using the following multipliers:
- P / E - the ratio of the market value of the share to the net profit attributable to one of them (from 0 to 5 - the company is underestimated);
- P / S is the ratio in which the numerator is the same and the denominator is revenue per share (norm - 2, with a value of less than 1 - the company is underestimated);
- P / BV - the ratio of the same value to the value of assets per share (a value exceeding 1 indicates a poor position in the company, if it is less than 1, then it is doing well);
- EV - the fair value of the company, equal to the sum of debt obligations and market capitalization less available cash;
- EBITDA - legal entity profit before taxes, depreciation and interest;
- EV / EBITDA - market valuation of profits (it is better to have less);
- Debt / EBITDA - how many years will it take a legal entity to recover debts through profit (the less, the better);
- EPS - net income per ordinary share;
- ROE - return on equity (the more the better).
At the same time, comparisons are carried out by legal entities belonging to the same industry. The analysis should be carried out on all the above multipliers.
Finally
We examined in this article what a multiplier is. In many cases, it is something that contributes to the increase of an object. But it's not always the case. And even in the economy, coefficients can be used to compare several legal entities, called multipliers, which do not reflect a multiple increase, but only state their economic situation.