What are the links that exist between ‘economic growth’, the ‘circular flow of income’ and the ‘multiplier effect’?
Faville Crescious
Masters in Economics. Currently completing my PGCE!
Every time there is an injection of new demand into the circular flow there is likely to be a multiplier effect. This is because an injection of extra income leads to more spending, which creates more income, and so on. Since economic growth can create more disposable income for households, there's an injection of extra income. If I earn another £10,000 and I spend it on a new car, the dealer now has an extra £10,000 in revenue. They can then use this and spend £5000 on advertising. In total, my £10,000 actually created £15,000 of benefit. That's the multiplier effect.
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