What is the multiplier effect of government spending, and how does it help the economy grow?
Answer (2)
The multiplier effect refers to the idea that when the government spends money, that spending generates more than its original value in total economic activity. In other words, a single peso spent by the government can create more than one peso of impact on the economy as it moves through different sectors.Let’s take a Philippine example. Suppose the government spends ₱10 million to build a public school in a barangay in Leyte. That money goes to construction workers, engineers, and suppliers of cement, steel, and paint. The construction workers then use their wages to buy food in the market, pay jeepney fares, and buy school supplies for their children. The sari-sari stores, jeepney drivers, and vendors also earn and continue the cycle. These additional rounds of spending cause a chain reaction that multiplies the impact of the original ₱10 million.This is why economists often say that government spending during a recession has a “multiplier effect.” It stimulates jobs, increases incomes, and raises demand in the economy. When used effectively, the multiplier effect can prevent recessions from becoming deeper and can help the country recover faster.In the Philippines, this concept is especially important because many people rely on cash income from construction work, public programs, or government-funded community projects. Without these, money would not circulate in local economies.However, the multiplier effect depends on how people use the money. If most of the income is saved or spent on imported goods, the multiplier is weaker. But when it is spent on local products and services, it can powerfully boost domestic economic activity.
The multiplier effect of government spending refers to the idea that an initial increase in government expenditure leads to a larger overall increase in national income and economic output.How It worksWhen the government spends money (e.g., on infrastructure, salaries, or social programs), it directly increases demand for goods and services.The businesses and workers who receive this money then have more income to spend on their own goods and services.This additional spending creates income for others, who also spend part of their increased earnings.This cycle repeats several times, with each round of spending smaller than the last, but cumulatively causing a total increase in economic activity greater than the original government spending.Why it Helps the Economy GrowIt boosts aggregate demand, especially during times of recession or low private sector spending.It increases employment and production as businesses respond to higher demand.It can lead to higher income and improved confidence, encouraging more investment and consumption.The overall result is economic growth that is larger than the initial government spending injection.
