Advertisements
Advertisements
प्रश्न
"Union Finance Minister stated, that investments in infrastructure and productive capacity have a large multiplier impact on growth and employment and in view of this, capital investment outlay is being proposed to increase steeply in the Budget 2023-24 by 1,000 crore.”
Based on the given text and common understanding, explain the working process of the increase in investment on the National Income, assuming the Marginal Propensity to Save (MPS) as 20%.
उत्तर
The working process of the increase in investment on the National Income, is based on the assumption that one’s expenditure is another’s income.
In Round 1, the investment in infrastructure undertaken by the government of 1,000 crore, will generate an additional income by the like amount (1,000 crore). Since Marginal Propensity to Save (MPS) is 0.2 i.e. MPC is 0.8 it will lead to an increase in the consumption expenditure by 800 crore (80% of 1,000) and saving by 200 crore (20% of 1,000).
As one’s expenditure is another’s income, an increase in consumption expenditure results in an increase in income by 800 crore in the subsequent round. This process continues till the sum of the change in savings becomes equal to the change in the investment.
| Round | Increase in investment (ΔI) (in crore) | Increase in income (ΔY) (in crore) | Increase in consumption (ΔC) (in crore) | Increase in savings (ΔS) (in crore) |
| 1 | 1,000 | 1,000 | 800 | 200 |
| 2 | − | 800 | 640 | 160 |
| 3 | − | 640 | 512 | 128 |
| − | − | . | . | . |
| Total | 1,000 | 5,000 | 4,000 | 1,000 |
Investment Multiplier = `1/(1−MPC)`
= `1/(1−0.8)` = 5
Thus, the above schedule indicates that an increase in investment (∆I) of 1,000 crore leads to a total increase in national income (∆Y) by 5,000 crore, 5 times the increase in investment.
