EXAMPLE OF MULTIPLIER EFFECT

  • In this case, the government spend £3bn on building roads. This involves employing workers (previously unemployed) and paying suppliers for raw materials. Initially, GDP rises £3bn

  • In the next period, workers spend part of this extra income – in shops and for transport. The suppliers also employ more workers – creating more employment.

  • This creates an additional economic output of £1bn.

  • Therefore the final increase in GDP is £4bn – from the initial injection of £3bn.

  • In this case, the multiplier effect is 1.33

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