Multiplier Effect

The Multiplier Effect or Multiplier Process in economics describes the multiplier or ripple effect spending and investment have on income, demand and expenditure through an economy. For example, investment in a project by business owner A benefits third-party contractors, which in turns pay subsequent parties along the chain (suppliers, materials). Each point in the chain spends a portion of the income they generate (in declining amounts as the income moves through the chain and as each point in the chain puts aside income as savings). In aggregate, total spending across the chain exceeds the sum of the initial investment. Government spending on, say, large scale infrastructure projects, has a large multiplier effect on demand; larger and more immediate, in fact, than the multiplier effect of a tax cut on income and spending.