An increase in autonomous investment, as we have seen, leads to an increase in income by an amount which is larger than the amount of increased investment. How large the increase in income will depend upon the value of the multiplier. The question that naturally comes to mind is, why should any increase in investment lead to this greater increase in income? to understand this, we have to analyse the working of the multiplier process.
It is a matter of common knowledge that the man’s expenditure is another man’s income. Whatever we spend on buying goods and services becomes the income of those who sell these things. Thus, if we spend more, income of some person go up, out of which they will spend more, thereby increasing the income of some other people. This process of income generation will continue, and therefore the sum total of increase in the income in an economy will be more than the amount of increase in initial spending. If, in this process each one who receives additional income spends a greater part of it, the total increase in income will be very large. But, if those who receive additional income, save most of it and spend only a small proportion of it and spend only a small proportion of it, the successive increase in income will be smaller, and thus the ultimate increase in income will be comparatively lower.
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