The leakages of investment multiplier or leakages of multiplier means the amount of unspent income or the amount of saved. Hi friends, in today’s article we are going to know about the Leakages of Multiplier (Criticism of Multiplier). So let’s discuss in details.
Table of Contents
What are the leakages of multiplier?
Following are the most important leakages of multiplier –
• Savings – Savings is the most important leakage of the multiplier process. Higher the MPS, the smaller the size of the multiplier and the greater is the amount of leakage of the income stream.
• Undistributed Profit – If profit of the joint stock companies are not distributed to the share holders, it a leakage from the income stream.
• Imports – The proportion of income spent on imports generates income in foreign countries, not in the domestic economy. Higher the portion of national income spent on imports, lower will be the value of multiplier.
• Hoarding – If people hoard a part of their increment in income as idle cash balances, this will reduce consumption expenditure in the economy equal to idle cash balances.
• Taxation – Taxation policy is also an important factor in leakaging the multiplier policy.
Criticism of Multiplier (Weakness of Multiplier)
The multiplier theory has been severely criticized by the Keynesian economists on the following grounds –
• It is a static phenomenon – Keynes principle of investment multiplier is a static concept which is not studies for the dynamic world. It simply shows the process of income generation from one point of equilibrium to another.
• It is a timeless phenomenon – By assuming an instantaneous relationship between income, consumption and investment, Keynes treated the multiplier as a timeless phenomenon.
• It has no empirical verification – Keynes theory of multiplier does not support any empirical verification such as linear relationship between income and consumption according to Lawrence Klein.
• It has neglected divined demand phenomenon of investment in capital goods – It fails to see the typical relationship between the demand for capital goods and consumption goods.
• Keynes multiplier theory is based on a number of assumptions like availability of consumer goods maintenance of investment, autonomous investment closed economy which may not be found in practice.
So friends, this was the concept of Leakages of Multiplier (Criticism of investment Multiplier). Hope you get the full details about it and hope you like this article.
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