In Economics, the Multiplier Process was first introduced in discussions of unemployment and business cycles in developed economies. It has become one of the pillars of modern Keynesian economics.

One should note that an increase in investment will cause income to expand, whereas a decrease in investment will cause it to contract, because investment is just one part of the national income. But if we think in terms of economic dynamics, the story does not end there. An increase in investment will initiate a process by which income will eventually increase by an amount greater than the original increase in investment.

The Multiplier Process is a chain reaction. For example, Mr. A decides to build a house and enters into an agreement with a contractor, Mr. B.  Mr. B gets paid a total payment $10,000. Out of which, suppose Mr. B makes a profit of $1,500; the rest he uses for paying the laborers he hires and for the building materials he buys. Mr. B will spend some of this additional income, but he will probably save a part too. The construction laborers and the wholesalers of building materials will do likewise—they will spend a part of their additional income and save the balance.

Note the impact of Mr. A’s investment upon national income and expenditures. When Mr. A gave Mr. B a check for $10,000 for a new workshop, there was an initial increase of that amount in society’s stream of income and expenditures. Furthermore, when Mr. B and his fellow laborers and merchants spend some of their income earned in the course of building Mr. A’s workshop, there will be an additional increase in income and expenditures. A further increase will follow in the next round, as Mr. C and others who sold materials and services to Mr. B will in turn spend some of their new income. This process will go on and on adding a smaller and smaller amount of income to the national income stream in each succeeding round.

There are three types of Multipliers in Economics.

They are:

(1) Employment Multiplier

(2) Price Multiplier

(3) Consumption Multiplier