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Going with my habit of overly simplified economy let's imagine economy that

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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

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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

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so maybe this is Mr Builder right over here

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

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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

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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

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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

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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

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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

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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

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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

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it's 0.6 to the 3rd power

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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

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so it's going to be 0.6

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times this thing which is already 0.6 times 0.6

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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

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percent of

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0.6 gives us 115 dollars

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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

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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

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these all views because economy is a very thing

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

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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

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1000 and that the last

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keep going on and on forever theoretically

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6 + 0.6 to the 4th power

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times 1000 and this will keep going on and on

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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

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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

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you can actually take this infinite sum and find number so just to simplify this

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the total output from that's kind of original 1000

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we can factured 1000 new colour

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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

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just for fun, but his write over here it's an infitinite sum

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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

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here that will be

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this will be equal one over

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0.4 and 0.4

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is two fifths one over two fifths

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which is equal to 5 halfs

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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)

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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

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multiplier fraction of that get spent

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some fraction of that get spent

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1000 that first 1000 dollars got multiplied

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by 2,5 and that 2,5 was completely a function of what the

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MPC was, so we have this relationship here

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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

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will than increase total output