Working of the multiplier process is based on one fundamental assumption: that there exists, excess capacity in the economy , so that whenever consumption expenditure rises (implying increase in demand ) there is a corresponding increase in production (implying increase in income ) . But poor countries like India, lack in production capacity. Accordingly, whenever demand increases (in terms of increase in consumption expenditure), there is increasing pressure of demand on the existing output (implying inflation or rise in prices) rather than the increase in output or income.
In poor countries like India , people spend a high percentage of their income so that APC and MPC are high . Yet , value of multiplier is low . Why?
Answers
JIGAR
Working of the multiplier process is based on one fundamental assumption: that there exists, excess capacity in the economy , so that whenever consumption expenditure rises (implying increase in demand ) there is a corresponding increase in production (implying increase in income ) . But poor countries like India, lack in production capacity. Accordingly, whenever demand increases (in terms of increase in consumption expenditure), there is increasing pressure of demand on the existing output (implying inflation or rise in prices) rather than the increase in output or income.