Leakages of multiplier

The incomes of people are influenced by various factors limiting the process of multiplier. That is, due to leakages in income flow the effect of multiplier is reduced. If the marginal propensity to consume is 50% than 50% of increased income is taken as the leakages and only 50% is used in consumption expenditure. Due to the leakages the national income does not increase fully. So, leakages in various forms are the leakages of multiplier. Main leakages of multiplier are as follows:

1. Saving

Saving is one of the most important leakages of the multiplier because whole part of the increment in income is not used in consumption since marginal propensity to consume is less than unity in other words, some parts of the income is saved and this will remain separate from the income flow that will occur later on. Therefore, the higher, the marginal propensity to save in the economy, the smaller is the size of the multiplier. Similarly, the lower the marginal propensity to save, the larger is the size of the multiplier.

2. Debt cancellation

If part of the increased income is used to pay back the loan, then that part of the income won’t have any kind of effect on consumption and this will check the process of the multiplier. As a result, the size of the multiplier will be small.

3. Net imports

If part of the increased income is used on the consumption of foreign goods, then this won’t have any kind of effect on the consumption of the national production. That is, the expenditure on imported goods is the loss to the country. This will decrease the value of the multiplier.

4. Inflation

If due to increased investment the inflation increases then most part of the increased income will be used to pay for the increased price. This will affect the multiplier. That is, increase in the price of the consumption goods of the consumer’s means the expenditure on those goods will increase. Increase in the price of goods decreases the real consumption of the people. Thus, inflation is also one of the main leakages of multiplier.

5. Purchase of old stock and securities

If some part of the increased income is used in the purchase of old stock and securities in addition to consumption goods, then cumulative effect of income will be less than before. As people start purchasing old stock and securities, the consumption expenditure decreases and the size of the multiplier will be small.