What is meant by 'Investment Multiplier', prove how a change in investment leads to multiple change in NI ?

Answer 1

In Keynesian theory, any multiplier (tax, consumption, government expenditure,etc) means that the contribution to the economy, when compared to a dollar value injection, has a greater than 1:1 impact.

In other words, if you increase investment by $1, the overall economy grows by more than $1.

Consider a primary equity market (ie, new stock freshly issued). EGD, Inc. issues 10 Billion shares at par value of $10 per share, or $100B overall. For simplicity sake, let's say that the agreement is set such that the underwriting financial institution keeps any value beyond $10 per share, and all shares sell, so that EGD raises its $100B in shareholder-provided capital. EGD now takes this $100B and purchases an existing production facility, as well as some machinery.

$100B spent so far, so the economy has grown by $100B since the existing $100B remains in effect (as wealth held in the form of securities), and has been spent in the purchase of physical capital.

But now the plant construction company took its share and purchased equipment, concrete, steel, etc, as well as paid insurance premiums and wages for its workers.

Likewise, the equipment manufacturers took their share and paid employees as well as purchased additional equipment and raw materials.

As you can see, the $100B keeps on spending. Ultimately, it peters down to the point where it no longer makes sense to track it (ie, the extra $6.50 the temp clerical worker got for doing the books went to a pack of smokes and a cup of coffee), or, from a theoretical standpoint, where no additional expenditure is made (if you got an extra $5, would you really increase your consumption?). THis is the limit of the investment multiplier.