On Friday we learnt about the Multiplier Effect - the fact that an increase in investment will lead to an even greater increase in national income. The example the book gave was of firms increasing spending on new factories by £100 million. This resulted in an increase in national income of £1000 million (multiplier = 10).
Sarah questioned how that £100 million is getting bigger - isn't it just being transferred around the economy? The answer is that it's not a simple transfer from firm A to firm B, because there's not just a flow of money - firm A is buying services in exchange for that money. And then of course firm B spends some of that £80m buying goods and services from C, etc. etc., and all the while the output of the economy is increased.
One way of looking at it is that the £100 million spent on factories adds in itself £100 million to national income. So any additional spending based on that £100 million (e.g. from Firm B to Firm C) will also be added to the national income.
I hope this helps. This video helps too.
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