Wednesday, August 14, 2019

Defination of Multiplier effect of Money in GDP of Country

I am explaining in a layman Language,
For Example:

The rain has stopped. You step out of home to run a few errands. On the way, you find Rs 500 note lying on the ground. You pick it up and put it in your trouser pocket, thinking you'll donate it to the local charity. But you give in to temptation as soon as you cross the local book shop and buy the latest bestseller for Rs 500. The bookseller is an alcoholic and uses the money to buy his stock of alcohol for the day. The liquor shop owner takes the Rs 500 and walks across to the local cinema and buys the ticket for the latest movie, featuring his favourite heroine. He also buys some atrociously priced popcorn and a soft drink. The cinema owner has to go attend a wedding at the other end of the town and he gives that very Rs 500 note to a taxi driver, given that his driver is on leave.

What's happened here? The movement of the initial Rs 500 has made everyone better off. The initial Rs 500 has been spent four times and has generated Rs 2,000 worth of economic activity. In that sense, the first Rs 500 contributed Rs 2,000 to the Indian gross domestic product (GDP). The same wouldn't have happened if you had taken the Rs 500 and deposited it in the bank or simply kept it in your pocket.

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