July 8, 2025 • 5 mins
What is the multiplier effect? And why is it good for economic growth?
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Welcome to Ask Fear and Greed, where we answer questions
about business, investing, economics, politics.
Speaker 2 (00:08):
And more. I'm Adam Lang and Hello Sean.
Speaker 3 (00:11):
Almer, Hello Danski or eight Sean.
Speaker 1 (00:14):
Today's question is about a term we hear from time
to time that some of us might not fully understand.
Speaker 2 (00:21):
Sean, what's the multiplier effect?
Speaker 3 (00:24):
The assumption is that I fully understand. We'll have to
wait and see it's where.
Speaker 2 (00:30):
It's where.
Speaker 3 (00:31):
An initial increase in spending can lead to a much
larger increase in overall economic activity. So the initial spending
generates income for others who then spend some of that income,
and so on and so on. It creates a much
larger impact than the initial spending itself sort of trickles down.
So think of it as an Example's easy, so I
(00:53):
do my weekly groceries. Let's say I spend four hundred
dollars on groceries. I spend that at woollies.
Speaker 2 (00:58):
Or only four hundred dollars Sean, Well.
Speaker 3 (01:00):
Yeah, eight kids a lot more. But I don't want
to admit to how much we spend on groceries. It's ridiculous.
Four hundred dollars will do for this example. So you know,
woolies and coals benefit from that. The staff of woolies
and coals benefit from that because they're getting a job.
The manufacturers and producers of milk and meat and fruit,
(01:20):
they benefit it from it because I'm spending money on that.
So they all take income from that. Four hundred dollars.
Now it's not much, but tens of thousands or millions
of people probably do this every week. And so you
add it all together and there's lots of money going
into the woollies, coals, aldi costco et cetera. Those people
(01:42):
spend it, so that's the first multiplier effect. They spend it.
Let's say they spend at JB High Fi buying something
from their income. The people at JB High Fi make money.
If the staff at JB High Fi make money, they
spend it. So it's this multiplier effect. It's why things
like the energy reb of seventy five dollars a quarter
actually has a much larger economic impact than seventy five dollars.
(02:07):
The multiplier effect on some of these things are much
much larger. Now, Adam, I'm smiling. Now you as an
economist introduced it introduces a concept known as the marginal
propensity to consume.
Speaker 2 (02:23):
Now, what's not to love about that?
Speaker 1 (02:26):
That?
Speaker 3 (02:26):
How much of your income do you consume? How much
do you save? If you are one of my children,
my teenage children, late teenagers, early twenties, at all, their
marginal propensity to consume is one. Everything they get they spend,
and good on them. As you get older, more sensible,
you think about retirement, you think about holidays. The marginal propensity.
Speaker 2 (02:50):
Maybe I should save is less invest.
Speaker 3 (02:53):
Maybe maybe Now I've got this great How do you
work out this multiplier effect?
Speaker 2 (03:00):
Oh? Yes, please, you're the only.
Speaker 3 (03:02):
Person listening to that there's any interest in this next bit.
I went to the Reserve Bank to get this. Their example,
suppose the business decides to build a wind farm in
a small town. They spend ten million dollars in the
first year. Now that goes to engineers people constructing the
wind farm. If that crowd on aggregate, their marginal propensity
(03:26):
to consume is zero point eight. So the initial spend
is ten million, marginal propensity to consume is zero point eight.
Those people will be spending eight million dollars on goods
and services and they save two million dollars. Now, next round,
that eight million dollars. Zero point out of that is
(03:46):
six point four million dollars, and so on and so on.
That initial ten million dollar investment with a marginal propensity
to consume actually results in fifty million dollars in addition
norm GDP.
Speaker 2 (04:02):
Because you wonder of the multiplier effect.
Speaker 3 (04:04):
That's right, It's a wonderful thing. So the whole point
about this, I can't even remember what the original question is.
I think what the multiplier effect is. I've been carrying on.
You and I have both been into this because we
are both economists by training. It's a wonderful thing because
you spend it once and it just gets respent and
respent me in smaller amounts. It just keeps getting respent.
(04:28):
And that's why the multiplier effect is a good thing
for economic growth.
Speaker 1 (04:34):
Sean, is there a special Alma multiplier effect for the
eight kids worth of a supermarket investing you to worth
of every week?
Speaker 3 (04:43):
Even the adults spend everything we make because you're.
Speaker 2 (04:47):
Exhausted by the end of it. That's printed.
Speaker 3 (04:51):
Yeah, and you end up with one hundred bucks left
before the next payday. Well, you could say that you
think I couldn't be bollied I'm buying dinner. That's what
we do.
Speaker 1 (05:01):
So with the Reserve Bank, example was a marginal propensity
to consume of point eight Ailma.
Speaker 2 (05:07):
Thank you my family. Yeah, thank you and your family,
because you're lifting that average up.
Speaker 3 (05:11):
We are. We are contributing to economic growth more than most.
Speaker 2 (05:15):
Well played Sean, and thank you very much for the answer.
Speaker 3 (05:17):
Thank you, Adam.
Speaker 1 (05:18):
If you have a question for Fear and Greed, jump
onto the website Fearangreed dot com dot au or send
it through on any of the social media platforms. We'd
be delighted to answer it. I'm Adam Lang and this
is ask Fear and Greed.
Welcome to Ask Fear and Greed, where we answer questions
about business, investing, economics, politics.
Speaker 2 (00:08):
And more. I'm Adam Lang and Hello Sean.
Speaker 3 (00:11):
Almer, Hello Danski or eight Sean.
Speaker 1 (00:14):
Today's question is about a term we hear from time
to time that some of us might not fully understand.
Speaker 2 (00:21):
Sean, what's the multiplier effect?
Speaker 3 (00:24):
The assumption is that I fully understand. We'll have to
wait and see it's where.
Speaker 2 (00:30):
It's where.
Speaker 3 (00:31):
An initial increase in spending can lead to a much
larger increase in overall economic activity. So the initial spending
generates income for others who then spend some of that income,
and so on and so on. It creates a much
larger impact than the initial spending itself sort of trickles down.
So think of it as an Example's easy, so I
(00:53):
do my weekly groceries. Let's say I spend four hundred
dollars on groceries. I spend that at woollies.
Speaker 2 (00:58):
Or only four hundred dollars Sean, Well.
Speaker 3 (01:00):
Yeah, eight kids a lot more. But I don't want
to admit to how much we spend on groceries. It's ridiculous.
Four hundred dollars will do for this example. So you know,
woolies and coals benefit from that. The staff of woolies
and coals benefit from that because they're getting a job.
The manufacturers and producers of milk and meat and fruit,
(01:20):
they benefit it from it because I'm spending money on that.
So they all take income from that. Four hundred dollars.
Now it's not much, but tens of thousands or millions
of people probably do this every week. And so you
add it all together and there's lots of money going
into the woollies, coals, aldi costco et cetera. Those people
(01:42):
spend it, so that's the first multiplier effect. They spend it.
Let's say they spend at JB High Fi buying something
from their income. The people at JB High Fi make money.
If the staff at JB High Fi make money, they
spend it. So it's this multiplier effect. It's why things
like the energy reb of seventy five dollars a quarter
actually has a much larger economic impact than seventy five dollars.
(02:07):
The multiplier effect on some of these things are much
much larger. Now, Adam, I'm smiling. Now you as an
economist introduced it introduces a concept known as the marginal
propensity to consume.
Speaker 2 (02:23):
Now, what's not to love about that?
Speaker 1 (02:26):
That?
Speaker 3 (02:26):
How much of your income do you consume? How much
do you save? If you are one of my children,
my teenage children, late teenagers, early twenties, at all, their
marginal propensity to consume is one. Everything they get they spend,
and good on them. As you get older, more sensible,
you think about retirement, you think about holidays. The marginal propensity.
Speaker 2 (02:50):
Maybe I should save is less invest.
Speaker 3 (02:53):
Maybe maybe Now I've got this great How do you
work out this multiplier effect?
Speaker 2 (03:00):
Oh? Yes, please, you're the only.
Speaker 3 (03:02):
Person listening to that there's any interest in this next bit.
I went to the Reserve Bank to get this. Their example,
suppose the business decides to build a wind farm in
a small town. They spend ten million dollars in the
first year. Now that goes to engineers people constructing the
wind farm. If that crowd on aggregate, their marginal propensity
(03:26):
to consume is zero point eight. So the initial spend
is ten million, marginal propensity to consume is zero point eight.
Those people will be spending eight million dollars on goods
and services and they save two million dollars. Now, next round,
that eight million dollars. Zero point out of that is
(03:46):
six point four million dollars, and so on and so on.
That initial ten million dollar investment with a marginal propensity
to consume actually results in fifty million dollars in addition
norm GDP.
Speaker 2 (04:02):
Because you wonder of the multiplier effect.
Speaker 3 (04:04):
That's right, It's a wonderful thing. So the whole point
about this, I can't even remember what the original question is.
I think what the multiplier effect is. I've been carrying on.
You and I have both been into this because we
are both economists by training. It's a wonderful thing because
you spend it once and it just gets respent and
respent me in smaller amounts. It just keeps getting respent.
(04:28):
And that's why the multiplier effect is a good thing
for economic growth.
Speaker 1 (04:34):
Sean, is there a special Alma multiplier effect for the
eight kids worth of a supermarket investing you to worth
of every week?
Speaker 3 (04:43):
Even the adults spend everything we make because you're.
Speaker 2 (04:47):
Exhausted by the end of it. That's printed.
Speaker 3 (04:51):
Yeah, and you end up with one hundred bucks left
before the next payday. Well, you could say that you
think I couldn't be bollied I'm buying dinner. That's what
we do.
Speaker 1 (05:01):
So with the Reserve Bank, example was a marginal propensity
to consume of point eight Ailma.
Speaker 2 (05:07):
Thank you my family. Yeah, thank you and your family,
because you're lifting that average up.
Speaker 3 (05:11):
We are. We are contributing to economic growth more than most.
Speaker 2 (05:15):
Well played Sean, and thank you very much for the answer.
Speaker 3 (05:17):
Thank you, Adam.
Speaker 1 (05:18):
If you have a question for Fear and Greed, jump
onto the website Fearangreed dot com dot au or send
it through on any of the social media platforms. We'd
be delighted to answer it. I'm Adam Lang and this
is ask Fear and Greed.
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