0:00:00.000,0:00:03.000
Going with my habit of overly simplified economy let's imagine economy that

0:00:03.000,0:00:07.000
has only two actors in it: so that's Mr Farmer right over here

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I'll do my best to draw the farmer, maybe he has the mustache of some kind

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so that's Mr Farmer right over here, he's got a hat on

0:00:15.000,0:00:20.000
so it has Mr Farmer So that is the Farmer

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in this economy, and we'll also have a Builder

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so this economy they are producing two things: they are producing food and this Builder

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can help mantain stuff so maybe

0:00:31.000,0:00:38.000
so maybe this is Mr Builder right over here

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is Mr Builder. And let's say, for the sake of

0:00:40.000,0:00:44.000
do here let's say that for this economy it kind of a constant that

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either of these fellows gets an extra dollar to spend

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he is going to spend 60% of it so I'll introduce a formal word that

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that really is another way of saying that: in this economy

0:00:55.000,0:00:59.000
the marginal propensity to consume: MPC

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propensity to

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consume is

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open parentesis is often MPC

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that is equal to say 60%

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and or is equal to 0.6

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And all this thing if someone in this economy somehow finds another dollar

0:01:23.000,0:01:26.000
in their pocket they're going to spend 0.6 of that or

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60% of that, so if you give the Builder, if the builder gets some extra dollar

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he is going to spend another 60 cents on another things Farmer

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if the Farmer gets another dollar he is going to spend 60%

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or 60 cents with the builder. Now, given this assumption let's

0:01:43.000,0:01:47.000
think about what'll happen in this economy if all of the sudden one of them decided to

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increase their spending over there: so all the sum

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economy let's say the farmer discovers

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a sac in a drawer that he didn't realise was there

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currency maybe get a

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maybe currency in that is

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dollar and the farmer discovers that he

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he discovers a big power dollar in the sac

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and he say and do some repairs to my building

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so let's we have this kind of increase in

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spending that's going on, so the farmer says I'm going to spend

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I'm going to spend 1000 dollars and I'm going to

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give it to the builder, now the builder says

0:02:33.000,0:02:40.000
1000 dol, I have the marginal propensity to consume or 0.6

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he is going to spend

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with the farmer he is going to spend 60%

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times 1000 dol, which is equal to 600 dol

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well now the farmer says

0:03:00.000,0:03:03.000
1000 somehow the builder to spend

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more on me much more

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I had 600 more I have the marginal propensity

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to consume of 0.6 or 60% so I'll spend

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60% of that 600 dol that I've just got

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it will be 60% of that thing so it will be

0:03:23.000,0:03:27.000
60 decimal so it will be 0.6

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times this thing which is 0.6

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times 1000 or you can say 60%

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of this 600 dol which is going to equal to 360 dol.

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now the builder says

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I gave the initial 600 dol another 360 dollars

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and I have the amrginal propensity to consume of 0.6 so I'll

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spend 60% of that bothered on this spending

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he also spends 60% of this right over here and 60% of this

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is 0.6 times this whole thing

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0.6 times this thing

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times 0.6 times this thing - times 0.6

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times 1000 dol. Now this

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number right over here 60% of 360 dol

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I'd like to calculator to figure what it is exactly

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so let's say that I have

0:04:28.000,0:04:34.000
it's 0.6 to the 3rd power

0:04:34.000,0:04:37.000
0.6 to the third

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multiply that times 1000

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gives us 216 dollars. so this guy

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write it over here

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I'm going to spend 60% of that

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is going, and 60% of you see where it's going

0:04:55.000,0:04:56.000
so it's going to be 0.6

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times this thing which is already 0.6 times 0.6

0:05:02.000,0:05:08.000
0.6 times 0.6 to the 3rd power

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0.6 to the 4th power times

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1000 which is whatever sixty

0:05:16.000,0:05:17.000
percent of

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0.6 gives us 115 dollars

0:05:24.000,0:05:27.000
129, and this guy Oh I have

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spend 60% of that, and this goes on and on

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so given this think how much from that incremental

0:05:35.000,0:05:39.000
increase of spending of a 1000 dollars how much total

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new production and spending happen in this economy

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so the way to think about that - so the total

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we can do the either way we can do kind of GDP

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output income expenditure

0:05:56.000,0:06:00.000
these all views because economy is a very thing

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one persone's expenditure turns into another person's income

0:06:03.000,0:06:07.000
we can say total output here measured in our agreed currency

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which is dollars this is now going to be

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original 1000 farmer spend for the builder

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original 1000 plus this 1st right over here

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this that the builder spent

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.6 times 1000 plus

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than we have this time the farmer said I'm

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6 square

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times 1000 and than this guy

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I spend 60% of that

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and spend gives 3rd power

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1000 + 0.6 to the 3rd power times

0:06:52.000,0:06:55.000
1000 and that the last

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keep going on and on forever theoretically

0:06:59.000,0:07:04.000
6 + 0.6 to the 4th power

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times 1000 and this will keep going on and on

0:07:08.000,0:07:11.000
forever plus 0.6 to the 5th power

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0.6 to the 6th power and going on and on forever

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and one of those things about mathematics

0:07:21.000,0:07:24.000
equall multuply is that you can actually sum

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up because this value right over here is less than one

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ends up being infinite sum

0:07:31.000,0:07:35.000
you can actually take this infinite sum and find number so just to simplify this

0:07:35.000,0:07:40.000
the total output from that's kind of original 1000

0:07:40.000,0:07:43.000
we can factured 1000 new colour

0:07:43.000,0:07:48.000
so we can fracturate 1000 left with

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one plus 0.6 plus

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0.6 square + 0.6

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to the third power plus 0.6 to the 4th power

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on and on and on and on the next video

0:08:04.000,0:08:10.000
just for fun, but his write over here it's an infitinite sum

0:08:10.000,0:08:12.000
geometric series and this actually simplify to

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as one over one

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minus 0.6, so whatever this number is

0:08:20.000,0:08:23.000
here that will be

0:08:23.000,0:08:30.000
this will be equal one over

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0.4 and 0.4

0:08:34.000,0:08:37.000
is two fifths one over two fifths

0:08:37.000,0:08:40.000
which is equal to 5 halfs

0:08:40.000,0:08:46.000
so your total output is going to be equal to

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1000 times 5 halfs

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and this the same thing as equal to 1000 times 2,5

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which is equal to 25 hundret (2500)

0:08:58.000,0:09:02.000
there is two interesting ideas going here. one is when people get a bit of more income, they're going to

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spend some of it adn that's the marginal propensity to consume

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how much you 60% of that

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60% it keep going multiplied throw the economy

0:09:13.000,0:09:17.000
multiplier fraction of that get spent

0:09:17.000,0:09:20.000
some fraction of that get spent

0:09:20.000,0:09:24.000
1000 that first 1000 dollars got multiplied

0:09:24.000,0:09:29.000
by 2,5 and that 2,5 was completely a function of what the

0:09:29.000,0:09:34.000
MPC was, so we have this relationship here

0:09:34.000,0:09:37.000
is that whatever the marginal propensity to consumer is that drives

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the multiplier that drives the multiplier

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all the multiplier say if you spend an extra dollar in this economy

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given people's MPC how much

0:09:49.000,0:09:53.000
will than increase total output