In poor countries like India,people spend a high percentage of their income so that apc and mpc are high.Yet value of the multiplier is low.why?
Hey Sukanya,
The functioning of the multiplier process is based on the assumption that there exists excess capacity in the economy. Thus, when the aggregate demand increases, it leads to increase in production which in turn results in the increase in income or output. But in poor countries like India, production capacity is lacking. So, when the aggregate demand increases, it does not result in the increase in income or output because of the lack in production capacity. However, this increase in demand ultimately increase the prices or inflation in the economy. Hence, we can say that due to the above mentioned reason the value of the multiplier in poor countries is low.
The functioning of the multiplier process is based on the assumption that there exists excess capacity in the economy. Thus, when the aggregate demand increases, it leads to increase in production which in turn results in the increase in income or output. But in poor countries like India, production capacity is lacking. So, when the aggregate demand increases, it does not result in the increase in income or output because of the lack in production capacity. However, this increase in demand ultimately increase the prices or inflation in the economy. Hence, we can say that due to the above mentioned reason the value of the multiplier in poor countries is low.