Question

200 words essay Compare and contrast the Multiplier with that of the Accelerator

Answer 1

The Multiplier:

Keynes’ Multiplier Theory gives great importance to increase in public investment and government spending for raising the level of income and employment. Both consumption and investment create employment. But both have complementary relationship with one another. When investment increases, consumption increases too and helps in creating employment. It is only when the level of full employment has been reached that investment and consumption become competitive instead of being complementary; then increase in one will reduce the other, one will be at the expense of the other.

Kahn’s Employment Multiplier:

Kahn’s Multiplier is known as Employment Multiplier, and Keynes’ Multiplier is known as Investment Multiplier. According to Kahn’s Employment Multiplier, when government undertakes public works like roads, railways, irrigation works then people get employment. This is initial or primary employment. These people then spend their income on consumption goods. As a result, demand for consumption goods increases, which leads to increase in the output of concerned industries which provides further employment to more people. But the process does not end here. The entrepreneurs and workers in such industries, in which investment has been made, also spend their newly obtained income which results in increasing output and employment opportunities. In this way, we see that the total employment so generated is many times more than the primary employment.

Suppose the government employs 300,000 persons on public works and, as a result of increase in consumer goods, 600,000 more persons get employment in the concerned industries. In this way, 900,000 persons have been able to get employment, that is, three times more people are now employed. In other words, Kahn’s employment multiplier means that by the government undertaking public works many more times total employment is provided as compared with initial employment.

Keynes’ Income or Investment Multiplier:

Keynes’ income multiplier tells us that a given increase in investment ultimately creates total income which is many times the initial increases in income resulting from that investment. That is why it is called income multiplier or investment multiplier. Income multiplier indicates how many times the total income increases by a given initial investment.