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The multiplier process An initial change in aggregate demand can have a much greater final impact on th e level of equilibrium national income. This is commonly known as the multiplier effect and it comes about because injections of demand into the circular flow o f income stimulate further rounds of spending in other words one person s spending is another s income and this can lead to a much bigger effect on equilibrium output and employment. The construction boom and multiplier effects A stud
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  The multiplier processAn initial change in aggregate demand can have a much greater final impact on the level of equilibrium national income. This is commonly known as the multipliereffect and it comes about because injections of demand into the circular flow of income stimulate further rounds of spending  in other words  one person  s spendingis another  s income     and this can lead to a much bigger effect on equilibrium outputand employment.The construction boom and multiplier effectsA study has found that the British construction sector alone has driven a fifthof UK GDP growth in the past year and 34% of net job creation in the past two years. The construction boom has been caused by the combination of large projectslike Terminal 5, the Channel Tunnel Rail Link, Wembley Stadium and the ScottishParliament with a revival in house building, heavy expenditure by the public sector on new schools and hospitals and a surge in home improvement expenditure.The study provides compelling evidence on the multiplier effects of major capital investment projects. 'One characteristic of construction activity is that it feeds through to many other related businesses. It has backward linkages into the likes of building materials; steel, architectural services, legal services and insurance, and most of these linkages tend to result in jobs close to home. This makes a boom in construction peculiarly powerful in fuelling expansion in theeconomy - for a given lift in building orders, the multiplier effect may be well over two. This means that every building job created will generate at least two others in related areas and in downstream activities such as retailing, whichbenefits when building workers spend their wages. Other industries, particularlythose where much of the output value comes in the form of imported components,might have a multiplier of less than 1.5 for new projects'.Adapted from a report from the Centre for Economics and Business ResearchThe accelerator effectPlanned capital investment by private sector businesses is linked to the growthof demand for goods and services. When consumer or export demand is rising strongly, businesses may increase investment to expand their production capacity andmeet the extra demand. This process is known as the accelerator effect. But theaccelerator effect can work in the other direction! A slowdown in consumer demand can create excess capacity and may lead to a fall in planned investment demand.A good example of this in recent years is the telecommunications industry. Capital investment in this sector surged to record highs in the second half of the 1990s, driven by a fast pace of technological advance and huge increases in the ICT budgets of corporations, small-to-medium sized businesses, and extra capital investment by the public sector (including education and health).The telecommunications industry invested giant sums in building bigger and faster networks, but demand has slowed in the first three of the decade, leaving theindustry with a vast amount of spare capacity (an under-utilisation of resources  ). Capital investment spending in the telecommunications industry has fallen sharply in the last three years  the accelerator mechanism working in reverse.
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