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Leakages In Multiplier

In real life, the operation of simple multiplier is affected by many leakages. Leakage the multiplier arise out of the following reasons:

(1)    Saving. If all the income is spent on consumption, then every increase in investment will raise the level of income. But, if a large proportion of the income is kept as saving, it will certainly have different effect on the intensity of multiplier.

(2)    Debt Cancellation. If the people use a large proportion of their income in debt repayment, they will have miller amount of income left for consumption. As a result, marginal propensity to consume falls and the value of multiplier also goes down.

(3)    Imports. If the imports of a country exceed its exports a large portion of the national income will go to the foreigners. Consequently, the multiplier effect of this expenditure is transmitted abroad. In such a situation, any increase in the investment will not increase the level of income in the economy.

(4)    Price Inflation. When the economy reaches the full employment level or very close to it, every increase in investment will bring about a simultaneous increase in the price level. A large portion of incremental income will be spent in baying costly thins; therefore, the intensity of multiplier becomes weak.

(5)    Liquidity Preference. People keep a part of their money income in liquid form. Liquidity preference reduces the present level of consumption of the community, as a result, the multiplier loses its strength.

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