The multiplier effect of public spending refers to the increasing effect of public spending on the economy. In other words, we can say that the initial expenditure made by the government (spending public) will be increased or increased by a series of factors that affect said increase.
How is the multiplier effect of public spending calculated?
In order to calculate this multiplier effect we are based on the following formula:
Multiplier = 1 - (1-PMC)
The term "PMC" refers to the marginal propensity to consume, which is the proportion of entry that consumers decide to reserve it to be able to spend and consume in other goods and services (considering the rest of constant variables, such as savings).
Example of the multiplier effect of public spending
Government public spending will be increased by several factors that will depend on the type of spending in question. When such public spending, for example, is used to pay salaries of workers, they will spend their disposable money (PMC) on other goods and services that they prefer.
Imaginemos que los consumidores consumen X producto. Los productores del producto X tendrán que producirlo, y por su venta generarán un ingreso, que parte de ellos irá a pagar a los trabajadores por su labor realizada. Parte del salario que reciban los trabajadores del producto X también destinarán su salario a otros productos, y así sucesivamente. El efecto multiplicador será el equivalente al número de veces que se ha multiplicado el dinero entre los diferentes trabajadores (según el gasto que se haya realizado).
The multiplier effect of public spending is higher in developing or underdeveloped economies because people in these economies have a greater propensity to consume, being their investment spending much higher than saving (both public and private).