How Investment Flows Through the Economy
In the previous section, you learned that an increase in investment causes an increase in employment and income, and that a decrease in investment causes a decrease in employment and income.
What I didn’t tell you is that the effect of a dollar increase or decrease in investment is actually greater than one dollar. The effect on GDP is multiplied. In other words, a $10,000 investment by a business does not simply increase the I in C + I + G, and thus GDP, by $10,000. It increases GDP by a multiple of that amount. That’s why this effect is called the multiplier effect.
For such a technical concept, the multiplier effect is quite easy to grasp. When a company invests $10,000 to expand its building, it ...