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

Answer 1

well you have the first bit of the answer yourself. Investment multiplier is the change in national income which would result from a unit change in investment. The relationship with national income comes in the formula Y = C + I + G + (X-M) in words national income= consumption + investment+ government expenditure + exports-imports.
Secondly, you ask how it leads to a multiple change in NI, this is due of course to the multiplier affect, the size of which will depend on the MPC (marginal propensity to consume) as well as other factors such as MPS (save) and MPT(tax). Simply put if $1 is invested and the MPC is .4, 40cent of it will be spent, 16cent of that will and well the maths is too hard after than, the increase wont just be $1 it will be 1+.4+.16 and so on. Hope that helps

Answer 2

Well just to make it simpler...suppose that your company pays your salary of $1000. Now look here how this $1000 will reach generate income of 5,000:
You take the $1000... from this 1000, you spend 80% of it (as a standard of consumption) and save 20%. So for example you go and pay $800 to a friend who is in need ...so now out of the 1000 your friends earn $800. Now the 1000 has actually generated $800 over and above the 1000. National Total Income= 1800. Now suppose that your friend spends 80% of the 800 dollars ($640)and saves the rest...He pays it for buying a stereo for example, which then goes to pay for the salary of workers in the stereo shop. So now your original $1000 salary which was paid to you by you company has actually generate Income of 800+640= $1,440 so far......later the worker at the stereoshop saves 20% and spends 80% of the $640 ($512) which goes as income to other people, and so on...until your 1000 finally gerates income of $5000 (1000/0.2). So the 1000 contributed 5000 dollars (if we say 80% is the consumption, and 20% saving) to National Income...cool ya? :). I hope this helps, If u need more info let me know.

Answer 3

National income is comprised with the basic elements of
YD = C+I+G+(NX) therefore any increase in investments would lead to an increase in the national income