Spending out of income is called induced spending. Equivalently, it is known as ‘endogenous’ spending.
This kind of spending rises and falls roughly in line with income. When income rises, households consume more. When income falls, they consume less.
Because some spending is induced, an initial act of autonomous spending will cause a multiplied increase in new spending and new income. This is known as the expenditure-multiplier effect....heteconomist
Short & Simple 16 – The Expenditure Multiplier and Income Determination
Peter Cooper
2 comments:
Advancing to the correct multiplier
Comment on Peter Cooper on ‘Short & Simple 16 ― The Expenditure Multiplier and Income Determination’
Peter Cooper states: “We have seen that total spending equals total income. It has been argued that it is spending that creates (or determines) income. This can be inferred from the observation that some spending can occur independently of income. Spending that occurs independently of income is called autonomous spending. … Examples of autonomous spending are: government spending; autonomous private consumption; private investment; exports.”
We have proven that the statement ‘total spending equals total income’ is false.#1 By consequence, the whole formal apparatus of MMT is defective. This, of course, affects also the multiplier.
The elementary version of the correct (objective, systemic, behavior-free, macrofounded) employment equation is shown on Wikimedia:#2
https://commons.wikimedia.org/wiki/File:AXEC62.png
From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.
The complete employment equation contains in addition profit distribution, the public sector, and foreign trade.
Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism.
The correct employment and income multiplier consists of TWO components, the expenditure ratio rhoE and the factor cost ratio rhoF. #3 The latter component is missing in the familiar approaches which leads to wrong policy prescriptions.
Egmont Kakarot-Handtke
#1 For the full-spectrum refutation of MMT see cross-references
http://axecorg.blogspot.de/2017/07/mmt-cross-references.html
#2 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421
#3 For more details see cross-references Employment
http://axecorg.blogspot.de/2015/08/employmentphillips-curve-cross.html
Now that we have uncovered the fact that business profits = household dissavings, what are we supposed to do about it? I (along with everyone else) have a legal and moral obligation to society to have access to housing, clothing, food, education, and health, to name a few, to provide for myself and my family, and yet, it is proven (by you) we all can't have access these. Now what?
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