Leakages

of Mul-plier
•  Increase in Income due to increase in ini-al
investment, does not go on endlessly.
•  The process of income propaga-on slows down
and ul-mately comes to halt. Causes responsible
for the decline in income are called leakages .
•  In words of Peterson ,” income that is not spent
on currently produced consump-on goods and
services may be regarded as having leaked out of
income steam .”
•  The more powerful these leakages are ,the
smaller will be the value of mul-plier.
 Some important leakages
•  Idle saving :idle saving leads to equivalent fall in
marginal propensity to consume .it results into
fall in the value of mul-plier. As a maFer of
fact ,higher the MPS greater is the leakage from
income propaga-on and smaller is the value of
mul-plier.
•  Purchase of govt.: securi-es and shares : when
some part of increased income is used to
purchase old shares and govt. securi-es means
this part of income is not spent on consumer
goods . Consequently , the flow of income
stream falls.
•  Paying of old debts :That part of increased
income which is u-lised in paying of old debts is
obviously not spent on cosump-on .This leakage
also constricts the process of income genera-on .
•  Import: liquidity drains out of the system
equivalent to the value of imports through which
propensity to consume falls limi-ng the
mul-plier effect of increased investment .
•  Excess stock of consump-on goods: increase in
income leads to increase in consump-on .if the
increased demand for consumer goods is met out
of the exis-ng stocks ,means new consumer
goods are not produced that results into
hampering the growth of mul-plier.
•  High liquidity Preference: it means if people want to
hold more money in cash for transac-on,
precau-onary and specula-ve mo-ves, it would
imply less expenditure also serves as a leakage of
mul-plier.
•  Price Infla-on: under infla-onary situa-on people
have to spend more money to buy same amount of
goods and services as before. The effect is that there
will be not much increase in level of consump-on
and ul-mately mul-plier effect will remain limited.
•  Taxa-on system : if taxes on goods and progressive
taxes on income are increased ,there will be no
appreciable increase in consump-on despite increase
in income . As a result process of income propaga-on
slows down .
•  Undistributed profits of companies: Many
companies do not distribute all the profits among
the shareholders; as they keep a part of it as a
reserve fund. The undistributed profits also
serves as a leakage of the mul-plier because this
amount is not made available to the shareholders
who could use it as a consump-on expenditure.
 Importance of Mul-plier
•  Income Propaga-on: concept of mul-plier tells
us that income propaga-on is a natural process.
It tells that increase in employment, income and
output is due to increase in investment .
*Income is generated in an economy in much the
same way as a stone thrown in a lake causes
ripples .*
•  Importance of Investment: it is the ini-al
increase in the investment that results in
mul-ple increase in income . As a maFer of fact,
investment is that dynamic element on which
changes in employment depend.
•  Trade Cycles: trade cycles are those cycles which tell
business fluctua-ons take place over a period of long
run. Some-mes there is a boom and at another -me
there is depression in business. So mul-plier helps in
understanding trade cycles .
•  Full Employment: Mul-plier’s concept is of great
importance while formula-ng policy regarding full
employment. it shows that to aFain full
employment situa-on a thrust of net investment
should be made in the economy .
•  Deficit Financing: deficit financing helps in removing
bad effects of depression. it is so because as a result
of deficit financing investment increases and
increase in investment causes mul-ple increase in
income in terms of mul-plier effect.
•  Equilibrium between Saving and Investment:
According to keynes theory of Employment ,
Equilibrium is established when Saving and
Investment are equal. Equilibrium between Saving and
Investment can be achieved through change in the
level of income. If saving is low in an economy, it can
be known from the concept of marginal propensity to
save how much increase in income is needed to get
the required increase in saving. And to increase the
level of income how much investment is needed, can
be determined from the co-efficient of mul-plier.
•  Public Investment: concept of mul-plier tes-fies that
if during depression, a liFle increase in public
investment is made, it will lead to mul-ple increase in
income such an increase in income will help in
controlling depression and unemployment.
 Mul-plier and Public Investment
•  Concept of mul-plier propounded by John
Meynard Keynes lays emphasis on the significance
and u-lity of public investment .
•  Public investment refers to govt. expenditure on
public works and public welfare ac-vi-es.
Purpose of this investment is not to earn profit ,
as is the case with private investment. It is called
autonomous investment, because it is
independent of profit mo-ve .
•  Its objec-ve is to increase employment and
s-mulate business during a cute depression
 Rela-onship between Mul-plier and
Public investment
•  There is a close rela-onship between mul-plier
and public investment . Concept of mul-plier
proves that if during depression public investment
is increased a liFle, it will lead to mul-ple increase
in income .
•  With a view to realizing full-mul-plier effect of
investment , the govt. should take care of the
following factors :
•  Public investment should be made in those areas
where MPC i.e (marginal propensity to consume) is
maximum. MPC is more in underdeveloped and
backward regions.
•  Public investment should be undertaken at a -me
when mul-plier effect is maximum. It is maximum
during boom and depression periods .
•  It is essen-al for the working of mul-plier that on
account of increase in Public investment, there
should be increase in the total investment in
country .
•  Income that increases on account of Public
investment should not be concentrated in hands of
the rich class as its marginal propensity to consume
is low .
•  As soon as economy aFains full employment
situa-on, the public investment should be
slashed considerably. If it is not done, the
mul-plier effect of public investment may give
rise to infla-on in the economy.
•  public investment should be so coordinated as to
get maximum mul-plier effect. At the same -me,
care should be taken to ensure that as soon as
signs of boom situa-on appear, the govt. should
slow down public investment or vice –versa .
•  Tautological : it is a Tautological concept wherein the
same thing has been said repeatedly in different
words .it does not express anything new.
•  Rela-on between Income and Consump-on: the
assump-on of mul-plier that MPC is less than unity
and remains constant is wrong ; because, in fact,
Rela-onship between income and consump-on is
not so simple as is assumed by keynes.
•  Effect of Accelera-on is Ignored: it does not take into
considera-on, change in investment as a result of
change in consump-on. In fact, mul-plier is
influenced not only by investment but also by
consump-on expenditure. if consump-on
expenditure is increased, the mul-plier will con-nue
to work, although no investment is undertaken.
•  Unnecessary importance to Deficit Financing :
concept of mul-plier has given Unnecessary
importance to Deficit Financing in preference to
many important and appropriate methods of
monetary policy.
•  Prac-cal Defects : the Prac-cal defects of concept
of mul-plier lies in the fact that it has made
investment a casual factor whereas, in reality,
investment is the effect of saving to a large
extent.
•  Complete Elas-city in the Supply of Funds and
Supply of Consumer’s Goods.
 Types of Mul-plier

Employment Mul-plier
•  The employment mul-plier is the ra-o of
increase in total employment to the increase in
primary or original employment .

Foreign Trade Mul-plier

•  The ra-o of change in total income to change in
export income is called foreign trade mul-plier.
 Employment Mul-plier
•  This concept is related to increase in employment.
According t∆o R.F khan increase in investment will cause in
increase in employment not only in those very industries
where in such investment has been made but in other
industries also.
•  Employment increases in two ways.
1) Primary Employment
2) Secondary Employment
•  Employment Mul-plier can be expressed by an equa-on as
follows.
K1=N2/N1
(Here k1=employment mul-plier; N2= Total employment;
N1= Primary employment.)

 Foreign Trade Mul-plier
•  When foreigners import goods from our country ,
domes-c export industries earn revenue. Income of
those people who work in export industries will
increase. They will increase their consump-on
expenditure.
•  The effect of it will be that, income of those who
produce consumer goods will rise.
•  In this way increase in export income, aggregate
income increases many -mes more.
•  It can be expressed by an equa-on as follows.
Kf= ∆Y/ ∆E .

 Working Of Mul-plier in under
developed countries
Mul-plier does not work in the same manner in
under developed countries as in developed
countries . According to keynes, in developed
economy an increase investment leads to
mul-ple increase in income because of the
mul-plier effect. The increase in income
depends on MPC.
•  No doubt, MPC is high in under developed
countries, the value of mul-plier is low.
Reason for why
the value of
mul2plier is low,
despite of high
degree of MPC
•  Working of mul-plier holds good when a part of an
increased income, as a result of increase in
investment, is spent in the second round. On
account of this expenditure in the second round
there will be a corresponding increase in income . In
this way income will go on rising. But ,
1.  In underdeveloped countries ,when income
increases ini-ally as a result of increase in
investment then this increased income when spent
in the market is not matched by the corresponding
flow of goods and services .
2.  That is, in these economies increase in consump-on
expenditure is not accompanied with increase in
produc-on. Ul-mately increase in consump-on
expenditure is followed by rise in prices
1.  Firstly, they will make more use of their
produce for self consump-on it will cause
corresponding fall in the marketable surplus.
2.  Secondly, they will increase their demand for
industrial goods, but the produc-on capacity
of the firms producing industrial goods is also
limited . Hence despite increase in demand
for industrial goods their real output does
not increase ; rather prices begin to rise.
•  Another reason being that: when income of the
people , in these economies increases it pushes
up the demand for food because of extreme
poverty.
•  Increased demand for food and other agricultural
products leads to increase in the income if the
farmers. The increased income the farmers will
not cause any increase in investment because;
1.  Supply of agricultural products is inelas-c , and
2.  In under developed countries there is a shortage
of resources for the development of agriculture .
•  So, farmers will use their increased income in
two ways :
•  According to Dr Rao, keynes concept of mul-plier is based
on certain assump-ons, such as :
1.  Open employment
2.  Industrialized economy
3.  Excess capacity in consump-on goods industries
4.  Compara-vely elas-c supply of raw material and working
capital .
•  All these assump-ons are lacking in under developed
countries. In these countries there is disguised
unemployment instead of involuntary unemployment .
•  Hence for want of assump-ons of mul-plier in under
developed countries this concept is not fully applicable to
them. In these countries since supply does not increase
immediately in response to increase in investment, prices
and not real income begin to rise.
 Dynamic Concept Of Mul-plier
•  Keynes concept of mul-plier is cri-cized as a
sta-c concept. It is a sta-c concept because it
simply tell how many -mes more increase in
income will be there as a result of given increase
in investment. However, this concept does not
reveal how and with what -me-lag this increase
in income will take place. It simply tell about the
final conclusion. The modern economist study
mul-plier in dynamic form it show the working of
mul-plier.
 Assump-ons
The modern theory of the mul-plier is based on
the following assump-ons:
•  The consump-on of the current period
(c1)depends on the income of the previous
period (yt-1).
•  There is -me lag between investment and
income. On other words investment in period
t will increase income in period t+1. it means
Yt+1=(fIt).
 Explana-on
•  The modern theory of dynamic mul-plier can be
explained with the help of table and figure a and b. it
should be remembered that there is -me lag between
change in investment and income. Whenever ini-al
investment is increased it takes lot of -me to increase.
This increase in income is not immediate take place. In
this -me lag, many other changes may take place.
•  The dynamic concept of mul-plier tell us how, from
the -me of ini-al change in investment, the process of
mul-plier moves on. The concept of mul-plier proves
valid in the sense that
increase in aggregate demand=aggregate increase
in investment*marginal propensity to consume
•  Table shows that as a result of ini-al increase in investment
by Rs 100 crore, there is change in income by Rs 100 crore.
Where MPC is .5. hence on account of increase income by Rs
100 crore. Consump-on will increased by 50 crore and 50 will
be saved.
•  Expenditure of one man is an income of another in an
economy. Hence due to expenditure of Rs 50 crore on
consump-on. Their will be an increased of Rs 50 crore in
income on second -me period. As a result of it, there will be
increased in consump-on by 25 crore and Rs 25 crore will be
saved.
•  On account of increase in consump-on expenditure by Rs 25
crore, there will be increase in income by Rs 25 crore in next
-me period.
•  Thus, in different -me period as shown in the table income
will go on increasing as a result of increase in consump-on
expenditure. Ul-mately income will increase to Rs 200 crore
mul-plier(K) =
 Diagramma-c Presenta-on

•  The process of mul-plier is expressed diagramma-cally in

fig b. this diagram is drawn on the assump-on that MPC=.5
and that consump-on ‘t’ -me depend upon income of ‘t-1’
-me.
it means that the consumer does not spend his
income immediately on it’s receipt but he spents it aoer a
-me period. there is -me lag between income and
consump-on expenditure.
•  In the fig, income is shown on ox-axis and expenditure on oy-axis.
AS is aggregate supply curve drawn on 45*. AD is aggregate
demand curve supposing , the ini-al equilibrium at an income level
is Rs 100 crore. In this situa-on the en-re income is consumed.
Point A is an equilibrium point. Because at this point, AD=AS.
Equilibrium point A is the ini-al point of mul-plier process.
Supposing an investment of Rs 100 crore is ini-ated in the
economy. As a result of it aggregate demand curve will shio to AD1.
(c+i+ i)
•  As a result of increase in investment by Rs 100 crore there will be
increase in income by Rs 100 crore in first round.
•  In the second round consumer will spend Rs 50 crore on
consump-on resul-ng in an increase in income by Rs 50 crore.
•  In third round the consumer will spend Rs 25 crore on
consump-on. As result, income will increase by 25 crore.
•  This process will con-nue -ll addi-onal consump-on expenditure
becomes 0. this situa-on will arise at point E when the level of
income become Rs 300 crore. It thus proves that an investment of
Rs 100 crore ul-mately leads to an increasing income by Rs 200
crore.
•  In other word, if MPC is 2 then an increase in investment by Rs 100
crore will ul-mately leads to increase in income by Rs 200 crore.
 Dynamic mul-plier and change in
investment
Process of dynamic mul-plier depends on change in
investment. There may be two types of change in
investment;
1. Single injec-on of investment; if investment is
increased only once, it will result into change in
income only once, thereaoer income will revert back
to its old level.
Supposing MPC=0.5 OR Mul-plier is 2
An increase in investment by Rs.10 crore will cause
an increase in income by Rs.10 crore in that period.
Thereaoer, as is shown in fig.
•  In the first -me period, income will increase
by Rs.5 crore.In the second -me period,
income will increase by Rs. 2.5crore.
•  In this way, aoer a few -me period find effect
of increase in investment will fade away and
increase in income will fall to zero. Economy
will return to ini-al level of expenditure .
2. Con-nuous injec-on of investment; effect of
mul-plier will be permanent if there is con-nous
injec-on of investment in the economy. It will enable
the income to move from its ini-al level to a new
level. Change due to con-nous injec-on of
investment.
The diagram is based on two assump-on ;
a)An investment of Rs. 10 crore is made in each -me period.
b) Marginal propensity to consume is 0.5.
To begin with, an investment of Rs. 10 crore will lead to an
increase in income by Rs.10crore. Out of this increased income Rs.5
crore will be spent on consump-on, because MPC 0.5. in this way,
during the first -me period, the total increase in income due to an
investment of Rs.10crore and consump-on-expenditure of Rs. 5 crore
will be 15 crore.
•  In 2nd -me period, new investment will be Rs.10crore,consump-on-
expenditure on account of increase in income in the first -me period
will be Rs.5crore and consump-on-expenditure on account of
increase in income, in the ini-al -me period will be Rs. 2.5 crore.
Income in the different -me period will
go on increasing -ll it reaches to Rs. 20crore. Which shows MPC=0.5
and hence mul-plier is 2.
 Characteris-cs of Mul-plier
•  Aggregate Demand ; That is, the investment and consump-on,
cause the mul-plier effect. Economists generally associate
mul-plier with change in investment. However, change in
consump-on or government expenditure or exports can have the
same effect.
•  It works in both direc-ons, i.e., forward and backward.
•  There is an inverse rela-onship between marginal propensity to
save and the size of the mul-plier.
•  Size of the mul-plier depends upon the sixe of marginal propensity
to consume. Higher the marginal propensity to consume, greater
will be the sixe of mul-plier.
•  Sixe of mul-plier is reduced propor-onate to the leakages of the
current income flow.
•  Mul-plier effect can operate con-nously only if there are con-nous
and autonomous changes in expenditure in the economy.
 Limita-ons of mul-plier
•  Availability of consumer goods
•  Mul-plier period
•  Less than full employment level
•  Steady flow of investment
•  Net incrase in expenditure
•  Net increase in investment
•  Autonomous investment
•  Closed Economy
•  Constant marginal propensity to consume
•  Industrialized economy
•  Surplus capacity in consumer goods industries
•  Availability of other resources of produc-on
•  No change in the distribu-on of income
•  No change in prices
•  Accelera-on effect ignored
 Leakages of Mul-plier
•  Increase in Income due to increase in ini-al
investment, does not go on endlessly.
•  The process of income propaga-on slows down
and ul-mately comes to halt. Causes responsible
for the decline in income are called leakages .
•  In words of Peterson ,” income that is not spent
on currently produced consump-on goods and
services may be regarded as having leaked out of
income steam .”
•  The more powerful these leakages are ,the
smaller will be the value of mul-plier.
 Some important leakages
•  Idle saving :idle saving leads to equivalent fall in
marginal propensity to consume .it results into
fall in the value of mul-plier. As a maFer of
fact ,higher the MPS greater is the leakage from
income propaga-on and smaller is the value of
mul-plier.
•  Purchase of govt.: securi-es and shares : when
some part of increased income is used to
purchase old shares and govt. securi-es means
this part of income is not spent on consumer
goods . Consequently , the flow of income
stream falls.
•  Paying of old debts :That part of increased
income which is u-lised in paying of old debts is
obviously not spent on cosump-on .This leakage
also constricts the process of income genera-on .
•  Import: liquidity drains out of the system
equivalent to the value of imports through which
propensity to consume falls limi-ng the
mul-plier effect of increased investment .
•  Excess stock of consump-on goods: increase in
income leads to increase in consump-on .if the
increased demand for consumer goods is met out
of the exis-ng stocks ,means new consumer
goods are not produced that results into
hampering the growth of mul-plier.
•  High liquidity Preference: it means if people want to
hold more money in cash for transac-on,
precau-onary and specula-ve mo-ves, it would
imply less expenditure also serves as a leakage of
mul-plier.
•  Price Infla-on: under infla-onary situa-on people
have to spend more money to buy same amount of
goods and services as before. The effect is that there
will be not much increase in level of consump-on
and ul-mately mul-plier effect will remain limited.
•  Taxa-on system : if taxes on goods and progressive
taxes on income are increased ,there will be no
appreciable increase in consump-on despite increase
in income . As a result process of income propaga-on
slows down .
•  Undistributed profits of companies : Many
companies do not distribute all the profits among
the shareholders; as they keep a part of it as a
reserve fund. The undistributed profits also
serves as a leakage of the mul-plier because this
amount is not made available to the shareholders
who could use it as a consump-on expenditure.
 Importance of Mul-plier
•  Income Propaga-on: concept of mul-plier tells
us that income propaga-on is a natural process.
It tells that increase in employment, income and
output is due to increase in investment .
*Income is generated in an economy in much the
same way as a stone thrown in a lake causes
ripples .*
•  Importance of Investment: it is the ini-al
increase in the investment that results in
mul-ple increase in income . As a maFer of fact,
investment is that dynamic element on which
changes in employment depend.
•  Trade Cycles: trade cycles are those cycles which tell
business fluctua-ons take place over a period of long
run. Some-mes there is a boom and at another -me
there is depression in business. So mul-plier helps in
understanding trade cycles .
•  Full Employment: Mul-plier’s concept is of great
importance while formula-ng policy regarding full
employment. it shows that to aFain full
employment situa-on a thrust of net investment
should be made in the economy .
•  Deficit Financing: deficit financing helps in removing
bad effects of depression. it is so because as a result
of deficit financing investment increases and
increase in investment causes mul-ple increase in
income in terms of mul-plier effect.
•  Equilibrium between Saving and Investment: According
to keynes theory of Employment , Equilibrium is
established when Saving and Investment are equal.
Equilibrium between Saving and Investment can be
achieved through change in the level of income. If
saving is low in an economy, it can be known from the
concept of marginal propensity to save how much
increase in income is needed to get the required
increase in saving. And to increase the level of income
how much investment is needed, can be determined
from the co-efficient of mul-plier.
•  Public Investment: concept of mul-plier tes-fies that if
during depression, a liFle increase in public investment
is made, it will lead to mul-ple increase in income such
an increase in income will help in controlling
depression and unemployment.
 Mul-plier and Public Investment
•  Concept of mul-plier propounded by John
Meynard Keynes lays emphasis on the significance
and u-lity of public investment .
•  Public investment refers to govt. expenditure on
public works and public welfare ac-vi-es.
Purpose of this investment is not to earn profit ,
as is the case with private investment. It is called
autonomous investment, because it is
independent of profit mo-ve .
•  Its objec-ve is to increase employment and
s-mulate business during a cute depression
 Rela-onship between Mul-plier and
Public investment
•  There is a close rela-onship between mul-plier
and public investment . Concept of mul-plier
proves that if during depression public investment
is increased a liFle, it will lead to mul-ple increase
in income .
•  With a view to realizing full-mul-plier effect of
investment , the govt. should take care of the
following factors :
•  Public investment should be made in those areas
where MPC i.e (marginal propensity to consume) is
maximum. MPC is more in underdeveloped and
backward regions.
•  Public investment should be undertaken at a -me
when mul-plier effect is maximum. It is maximum
during boom and depression periods .
•  It is essen-al for the working of mul-plier that on
account of increase in Public investment, there
should be increase in the total investment in
country .
•  Income that increases on account of Public
investment should not be concentrated in hands of
the rich class as its marginal propensity to consume
is low .
•  As soon as economy aFains full employment
situa-on, the public investment should be
slashed considerably. If it is not done, the
mul-plier effect of public investment may give
rise to infla-on in the economy.
•  public investment should be so coordinated as to
get maximum mul-plier effect. At the same -me,
care should be taken to ensure that as soon as
signs of boom situa-on appear, the govt. should
slow down public investment or vice –versa .
•  Tautological : it is a Tautological concept wherein the
same thing has been said repeatedly in different
words .it does not express anything new.
•  Rela-on between Income and Consump-on: the
assump-on of mul-plier that MPC is less than unity
and remains constant is wrong ; because, in fact,
Rela-onship between income and consump-on is
not so simple as is assumed by keynes.
•  Effect of Accelera-on is Ignored: it does not take into
considera-on, change in investment as a result of
change in consump-on. In fact, mul-plier is
influenced not only by investment but also by
consump-on expenditure. if consump-on
expenditure is increased, the mul-plier will con-nue
to work, although no investment is undertaken.
•  Unnecessary importance to Deficit Financing :
concept of mul-plier has given Unnecessary
importance to Deficit Financing in preference to
many important and appropriate methods of
monetary policy.
•  Prac-cal Defects : the Prac-cal defects of concept
of mul-plier lies in the fact that it has made
investment a casual factor whereas, in reality,
investment is the effect of saving to a large
extent.
•  Complete Elas-city in the Supply of Funds and
Supply of Consumer’s Goods.
 Types of Mul-plier

Employment Mul-plier
•  The employment mul-plier is the ra-o of
increase in total employment to the increase in
primary or original employment .

Foreign Trade Mul-plier

•  The ra-o of change in total income to change in
export income is called foreign trade mul-plier.
 Employment Mul-plier
•  This concept is related to increase in employment.
According t∆o R.F khan increase in investment will cause in
increase in employment not only in those very industries
where in such investment has been made but in other
industries also.
•  Employment increases in two ways.
1) Primary Employment
2) Secondary Employment
•  Employment Mul-plier can be expressed by an equa-on as
follows.
K1=N2/N1
(Here k1=employment mul-plier; N2= Total employment;
N1= Primary employment.)

 Foreign Trade Mul-plier
•  When foreigners import goods from our country ,
domes-c export industries earn revenue. Income of
those people who work in export industries will
increase. They will increase their consump-on
expenditure.
•  The effect of it will be that, income of those who
produce consumer goods will rise.
•  In this way increase in export income, aggregate
income increases many -mes more.
•  It can be expressed by an equa-on as follows.
Kf= ∆Y/ ∆E .

 Working Of Mul-plier in under
developed countries
Mul-plier does not work in the same manner in
under developed countries as in developed
countries . According to keynes, in developed
economy an increase investment leads to
mul-ple increase in income because of the
mul-plier effect. The increase in income depends
on MPC.
•  No doubt, MPC is high in under developed
countries, the value of mul-plier is low.
Reason for why
the value of
mul2plier is low,
despite of high
degree of MPC
•  Working of mul-plier holds good when a part of an
increased income, as a result of increase in
investment, is spent in the second round. On
account of this expenditure in the second round
there will be a corresponding increase in income . In
this way income will go on rising. But ,
1.  In underdeveloped countries ,when income
increases ini-ally as a result of increase in
investment then this increased income when spent
in the market is not matched by the corresponding
flow of goods and services .
2.  That is, in these economies increase in consump-on
expenditure is not accompanied with increase in
produc-on. Ul-mately increase in consump-on
expenditure is followed by rise in prices
1.  Firstly, they will make more use of their
produce for self consump-on it will cause
corresponding fall in the marketable surplus.
2.  Secondly, they will increase their demand for
industrial goods, but the produc-on capacity
of the firms producing industrial goods is also
limited . Hence despite increase in demand
for industrial goods their real output does
not increase ; rather prices begin to rise.
•  Another reason being that: when income of the
people , in these economies increases it pushes
up the demand for food because of extreme
poverty.
•  Increased demand for food and other agricultural
products leads to increase in the income if the
farmers. The increased income the farmers will
not cause any increase in investment because;
1.  Supply of agricultural products is inelas-c , and
2.  In under developed countries there is a shortage
of resources for the development of agriculture .
•  So, farmers will use their increased income in
two ways :
•  According to Dr Rao, keynes concept of mul-plier is based
on certain assump-ons, such as :
1.  Open employment
2.  Industrialized economy
3.  Excess capacity in consump-on goods industries
4.  Compara-vely elas-c supply of raw material and working
capital .
•  All these assump-ons are lacking in under developed
countries. In these countries there is disguised
unemployment instead of involuntary unemployment .
•  Hence for want of assump-ons of mul-plier in under
developed countries this concept is not fully applicable to
them. In these countries since supply does not increase
immediately in response to increase in investment, prices
and not real income begin to rise.