Advantages or importance of multiplier effect?

Answer 1

Concept of multiplier is important form the theoretical as well as practical point of view. For this reason, the importance of multiplier in business and economic sector. The importance of the multiplier can be explained as follows:

1. Importance in investment

Multiplier theory has taken investment as the important factor of the economy. The proportionate increase in the level of income and employment in the economy depends up on the multiplier. This clarifies that increase in income and employment is on the basis of increase in investment.

2. Analysis of trade cycle

It is easier to analyses trade cycle on the basis of multiplier. Multiplier helps in estimating the increase in income as a result of increase in investment. So, multiplier will be of great importance in formulating progressive policies to bring the effects in the economy to right speed.

3. Formulation of economic policy

The main objective of every economic policy is to create the situation of full employment in the economic. Therefore policy makers will formulate their country's economic policy using the multiplier. This will help in creating the situation of full employment.

4. Public investment

Public investment is of great importance specially in the situation of depression and unemployment, because this does not stress much on profits. Multiplier indicates the importance of public investment in increasing the level of employment.

5. Equality between saving and investment

The equality between saving and investment can be brought about with the help of multiplier. Increase in investment increases the income. Increase in income will bring about equality in saving and investment.