# Understanding Investment Multiplier: Definition, Examples, and Formula

![Investment Multiplier: The stimulative effects of public or private investments on the economy.](https://www.investopedia.com/thmb/xmOsWVQKU02vk3GUW5MRNuLaG5M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Investment-multiplier_final-9510b82696b64675b0cb1776578117af.png)

*— Investopedia / Michela Buttignol*

## What Is the Investment Multiplier?

The investment multiplier is a critical economic concept rooted in the theories of John Maynard Keynes. It suggests that increases in investment spending can have profound effects on the overall economy, triggering a cycle of increased income and consumption.

By understanding the investment multiplier, rooted in marginal propensity to consume (MPC) and save (MPS), one can grasp its far-reaching impact, exemplified in scenarios like government spending on infrastructure projects. This concept underscores how investments are not isolated financial actions but catalyze widespread economic activity.

### Key Takeaways

*   The investment multiplier amplifies the economic impact of investment spending on aggregate income.
*   Rooted in Keynesian economics, the investment multiplier highlights the chain effect of spending and income.
*   Key determinants of the investment multiplier include the marginal propensity to consume (MPC) and marginal propensity to save (MPS).
*   A higher MPC results in a greater investment multiplier, incentivizing economic stimulus through increased spending.

## How the Investment Multiplier Increases Economic Impact

The investment multiplier tries to determine the economic impact of public or private investment. For example, more government spending on roads can boost the income of both construction workers and materials suppliers. These people may spend the extra income in the retail, consumer goods, or service industries, boosting the income of workers in those sectors.

This cycle can repeat multiple times, turning road investments into [economic stimulus](https://www.investopedia.com/terms/e/economic-stimulus.asp) that helps workers in many industries.

Mathematically, the investment multiplier is a function of two main factors: the [marginal propensity to consume (MPC)](https://www.investopedia.com/terms/m/marginalpropensitytoconsume.asp) and the [marginal propensity to save (MPS)](https://www.investopedia.com/terms/m/marginal-propensity-save.asp).

> **Fast Fact**
>
> John Maynard Keynes was among the first economists to illustrate how governments can use multipliers, such as the investment multiplier, to stimulate economic growth through spending.

## Examples of the Investment Multiplier

Consider the road-construction workers in our previous example. If the average worker has an MPC of 70%, that means they consume $0.70 out of every dollar they earn, on average. In practice, they might spend that $0.70 on items such as rent, gasoline, groceries, and entertainment. If that same worker has an MPS of 30%, that means they would save $0.30 out of every dollar earned, on average.

Businesses, like individuals, also spend a large part of their income on expenses like wages, rent, and equipment repairs. A typical company might spend 90% of its income on these costs, leaving 10% as profits for shareholders.

## Calculating the Investment Multiplier: Formula and Explanation

Calculating a project's investment multiplier is simple:

$1 / (1 - MPC)$

In our above examples, the investment multipliers would be 3.33 and 10 for the workers and the businesses, respectively. The reason the businesses are associated with a higher investment multiple is that their MPC is higher than that of the workers. In other words, they spend a greater percentage of their income on other parts of the economy, thereby spreading the economic stimulus caused by the initial investment more widely.

## What Is the Investment Multiplier Formula?

To calculate the investment multiplier for a project the following formula can be used:

1/(1−_MPC_)

MPC is the acronym for marginal propensity to consume.

## Who Was John Maynard Keynes?

John Maynard Keynes was a ground-breaking British economist who is considered the father of modern macroeconomics. His book, _The General Theory of Unemployment, Interest, and Money_, was published in 1936 and is the foundation for [Keynesian economics](https://www.investopedia.com/terms/k/keynesianeconomics.asp).

## What Are Examples of Multipliers?

A variety of multipliers are used in economics and finance. Examples other than investment multiplier include [fiscal multiplier](https://www.investopedia.com/terms/f/fiscal-multiplier.asp), [earnings multiplier](https://www.investopedia.com/terms/e/earningsmultiplier.asp) , and [equity multiplier](https://www.investopedia.com/terms/e/equitymultiplier.asp).

## The Bottom Line

The investment multiplier measures how increases in public or private investments can amplify positive impacts on aggregate income and the broader economy, as illustrated by John Maynard Keynes' economic theories. It quantifies additional effects beyond initial measurable spending, with a higher multiplier indicating a more pronounced stimulative effect.

Understanding the marginal propensity to consume and save is key, as they determine the extent of this multiplier effect. This concept is just one of many economic multipliers that help assess the distribution of wealth and potential economic growth.

> **Article Sources**
>
> 1.  International Monetary Fund. “[What Is Keynesian Economics?](https://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm)”
>     
> 2.  Encyclopedia Britannica. "[Multiplier: Finance](https://www.britannica.com/topic/multiplier-finance)."
>     
> 3.  The Library of Economics and Liberty. "[John Maynard Keynes](https://www.econlib.org/library/Enc/bios/Keynes.html)."