ABSTRACT

The multiplier relation represents the pure theory of output and employment in a monetary production economy. This relation states how the scale of economic activity, that is, aggregate output and employment, is, in principle, determined by effective demand, which, significantly, is a monetary magnitude. Effective demand always enters the scene as autonomous and derived demand, with the former being, in principle, independent of income and output and with the latter dependent upon these magnitudes. In the multiplier formula the multiplier coefficient links, via derived or secondary demand, autonomous demand to equilibrium output and employment. This coefficient is directly associated with the leakages out of total income, that is, the secondary incomes created by the primary incomes which, in turn, equal autonomous expenditures. The crucial point is that the multiplier relation is, as a rule, associated with a level of employment below the full employment level, whereby, in principle, all the sectors of production and all the kinds of labour are affected in the same way. Involuntary unemployment may permanently exist, and there is no self-regulating mechanism to bring about full employment. These propositions hold for the short term, but also for the medium and long run (see, for example, Bortis, 1997, chapter 4; and Bortis, 2003a, pp. 461 ff.).