1 00:00:03,640 --> 00:00:06,280 Speaker 1: Welcome to Ask Fear and Greed, where we answer questions 2 00:00:06,320 --> 00:00:09,360 Speaker 1: about business, investing, economics, politics. 3 00:00:08,880 --> 00:00:11,560 Speaker 2: And more. I'm Adam Lang and Hello Sean. 4 00:00:11,320 --> 00:00:14,280 Speaker 3: Almer, Hello Danski or eight Sean. 5 00:00:14,400 --> 00:00:17,599 Speaker 1: Today's question is about a term we hear from time 6 00:00:17,640 --> 00:00:20,720 Speaker 1: to time that some of us might not fully understand. 7 00:00:21,000 --> 00:00:24,000 Speaker 2: Sean, what's the multiplier effect? 8 00:00:24,480 --> 00:00:28,639 Speaker 3: The assumption is that I fully understand. We'll have to 9 00:00:28,680 --> 00:00:30,520 Speaker 3: wait and see it's where. 10 00:00:30,720 --> 00:00:31,040 Speaker 2: It's where. 11 00:00:31,040 --> 00:00:33,400 Speaker 3: An initial increase in spending can lead to a much 12 00:00:33,600 --> 00:00:39,720 Speaker 3: larger increase in overall economic activity. So the initial spending 13 00:00:39,760 --> 00:00:43,680 Speaker 3: generates income for others who then spend some of that income, 14 00:00:43,760 --> 00:00:46,040 Speaker 3: and so on and so on. It creates a much 15 00:00:46,120 --> 00:00:49,760 Speaker 3: larger impact than the initial spending itself sort of trickles down. 16 00:00:49,800 --> 00:00:53,680 Speaker 3: So think of it as an Example's easy, so I 17 00:00:53,720 --> 00:00:55,800 Speaker 3: do my weekly groceries. Let's say I spend four hundred 18 00:00:55,840 --> 00:00:58,600 Speaker 3: dollars on groceries. I spend that at woollies. 19 00:00:58,360 --> 00:01:00,400 Speaker 2: Or only four hundred dollars Sean, Well. 20 00:01:00,320 --> 00:01:02,800 Speaker 3: Yeah, eight kids a lot more. But I don't want 21 00:01:02,800 --> 00:01:05,800 Speaker 3: to admit to how much we spend on groceries. It's ridiculous. 22 00:01:06,720 --> 00:01:09,720 Speaker 3: Four hundred dollars will do for this example. So you know, 23 00:01:09,920 --> 00:01:13,040 Speaker 3: woolies and coals benefit from that. The staff of woolies 24 00:01:13,040 --> 00:01:15,320 Speaker 3: and coals benefit from that because they're getting a job. 25 00:01:15,640 --> 00:01:19,919 Speaker 3: The manufacturers and producers of milk and meat and fruit, 26 00:01:20,640 --> 00:01:24,800 Speaker 3: they benefit it from it because I'm spending money on that. 27 00:01:25,600 --> 00:01:29,520 Speaker 3: So they all take income from that. Four hundred dollars. 28 00:01:29,720 --> 00:01:32,400 Speaker 3: Now it's not much, but tens of thousands or millions 29 00:01:32,400 --> 00:01:35,039 Speaker 3: of people probably do this every week. And so you 30 00:01:35,120 --> 00:01:37,679 Speaker 3: add it all together and there's lots of money going 31 00:01:37,680 --> 00:01:42,000 Speaker 3: into the woollies, coals, aldi costco et cetera. Those people 32 00:01:42,040 --> 00:01:46,960 Speaker 3: spend it, so that's the first multiplier effect. They spend it. 33 00:01:47,280 --> 00:01:49,760 Speaker 3: Let's say they spend at JB High Fi buying something 34 00:01:49,840 --> 00:01:52,360 Speaker 3: from their income. The people at JB High Fi make money. 35 00:01:52,400 --> 00:01:54,280 Speaker 3: If the staff at JB High Fi make money, they 36 00:01:54,320 --> 00:01:58,360 Speaker 3: spend it. So it's this multiplier effect. It's why things 37 00:01:58,440 --> 00:02:01,560 Speaker 3: like the energy reb of seventy five dollars a quarter 38 00:02:02,000 --> 00:02:06,720 Speaker 3: actually has a much larger economic impact than seventy five dollars. 39 00:02:07,200 --> 00:02:10,760 Speaker 3: The multiplier effect on some of these things are much 40 00:02:11,000 --> 00:02:15,640 Speaker 3: much larger. Now, Adam, I'm smiling. Now you as an 41 00:02:15,680 --> 00:02:21,320 Speaker 3: economist introduced it introduces a concept known as the marginal 42 00:02:21,440 --> 00:02:23,480 Speaker 3: propensity to consume. 43 00:02:23,960 --> 00:02:26,080 Speaker 2: Now, what's not to love about that? 44 00:02:26,080 --> 00:02:26,160 Speaker 1: That? 45 00:02:26,680 --> 00:02:29,880 Speaker 3: How much of your income do you consume? How much 46 00:02:30,000 --> 00:02:32,360 Speaker 3: do you save? If you are one of my children, 47 00:02:32,560 --> 00:02:36,640 Speaker 3: my teenage children, late teenagers, early twenties, at all, their 48 00:02:36,680 --> 00:02:42,880 Speaker 3: marginal propensity to consume is one. Everything they get they spend, 49 00:02:43,200 --> 00:02:46,280 Speaker 3: and good on them. As you get older, more sensible, 50 00:02:46,639 --> 00:02:50,760 Speaker 3: you think about retirement, you think about holidays. The marginal propensity. 51 00:02:50,600 --> 00:02:53,200 Speaker 2: Maybe I should save is less invest. 52 00:02:53,000 --> 00:02:57,840 Speaker 3: Maybe maybe Now I've got this great How do you 53 00:02:57,919 --> 00:02:59,400 Speaker 3: work out this multiplier effect? 54 00:03:00,160 --> 00:03:03,000 Speaker 2: Oh? Yes, please, you're the only. 55 00:03:02,800 --> 00:03:05,839 Speaker 3: Person listening to that there's any interest in this next bit. 56 00:03:06,160 --> 00:03:08,880 Speaker 3: I went to the Reserve Bank to get this. Their example, 57 00:03:08,960 --> 00:03:11,280 Speaker 3: suppose the business decides to build a wind farm in 58 00:03:11,320 --> 00:03:15,160 Speaker 3: a small town. They spend ten million dollars in the 59 00:03:15,160 --> 00:03:20,080 Speaker 3: first year. Now that goes to engineers people constructing the 60 00:03:20,120 --> 00:03:26,119 Speaker 3: wind farm. If that crowd on aggregate, their marginal propensity 61 00:03:26,160 --> 00:03:31,160 Speaker 3: to consume is zero point eight. So the initial spend 62 00:03:31,200 --> 00:03:34,359 Speaker 3: is ten million, marginal propensity to consume is zero point eight. 63 00:03:35,240 --> 00:03:38,840 Speaker 3: Those people will be spending eight million dollars on goods 64 00:03:38,920 --> 00:03:43,760 Speaker 3: and services and they save two million dollars. Now, next round, 65 00:03:44,160 --> 00:03:46,560 Speaker 3: that eight million dollars. Zero point out of that is 66 00:03:46,600 --> 00:03:49,800 Speaker 3: six point four million dollars, and so on and so on. 67 00:03:50,760 --> 00:03:54,640 Speaker 3: That initial ten million dollar investment with a marginal propensity 68 00:03:54,720 --> 00:04:00,000 Speaker 3: to consume actually results in fifty million dollars in addition 69 00:04:00,080 --> 00:04:01,000 Speaker 3: norm GDP. 70 00:04:02,400 --> 00:04:04,920 Speaker 2: Because you wonder of the multiplier effect. 71 00:04:04,920 --> 00:04:09,400 Speaker 3: That's right, It's a wonderful thing. So the whole point 72 00:04:09,400 --> 00:04:12,160 Speaker 3: about this, I can't even remember what the original question is. 73 00:04:12,200 --> 00:04:15,560 Speaker 3: I think what the multiplier effect is. I've been carrying on. 74 00:04:16,160 --> 00:04:17,800 Speaker 3: You and I have both been into this because we 75 00:04:17,839 --> 00:04:22,000 Speaker 3: are both economists by training. It's a wonderful thing because 76 00:04:22,000 --> 00:04:24,599 Speaker 3: you spend it once and it just gets respent and 77 00:04:24,680 --> 00:04:28,200 Speaker 3: respent me in smaller amounts. It just keeps getting respent. 78 00:04:28,920 --> 00:04:31,880 Speaker 3: And that's why the multiplier effect is a good thing 79 00:04:32,480 --> 00:04:33,440 Speaker 3: for economic growth. 80 00:04:34,000 --> 00:04:39,080 Speaker 1: Sean, is there a special Alma multiplier effect for the 81 00:04:39,080 --> 00:04:42,840 Speaker 1: eight kids worth of a supermarket investing you to worth 82 00:04:42,839 --> 00:04:43,360 Speaker 1: of every week? 83 00:04:43,760 --> 00:04:47,520 Speaker 3: Even the adults spend everything we make because you're. 84 00:04:47,360 --> 00:04:50,480 Speaker 2: Exhausted by the end of it. That's printed. 85 00:04:51,640 --> 00:04:54,040 Speaker 3: Yeah, and you end up with one hundred bucks left 86 00:04:54,080 --> 00:04:57,120 Speaker 3: before the next payday. Well, you could say that you 87 00:04:57,160 --> 00:05:00,160 Speaker 3: think I couldn't be bollied I'm buying dinner. That's what 88 00:05:00,200 --> 00:05:00,440 Speaker 3: we do. 89 00:05:01,200 --> 00:05:04,400 Speaker 1: So with the Reserve Bank, example was a marginal propensity 90 00:05:04,480 --> 00:05:06,279 Speaker 1: to consume of point eight Ailma. 91 00:05:07,080 --> 00:05:09,600 Speaker 2: Thank you my family. Yeah, thank you and your family, 92 00:05:09,640 --> 00:05:11,160 Speaker 2: because you're lifting that average up. 93 00:05:11,520 --> 00:05:15,240 Speaker 3: We are. We are contributing to economic growth more than most. 94 00:05:15,200 --> 00:05:17,640 Speaker 2: Well played Sean, and thank you very much for the answer. 95 00:05:17,760 --> 00:05:18,440 Speaker 3: Thank you, Adam. 96 00:05:18,800 --> 00:05:21,599 Speaker 1: If you have a question for Fear and Greed, jump 97 00:05:21,680 --> 00:05:24,400 Speaker 1: onto the website Fearangreed dot com dot au or send 98 00:05:24,440 --> 00:05:27,120 Speaker 1: it through on any of the social media platforms. We'd 99 00:05:27,160 --> 00:05:29,880 Speaker 1: be delighted to answer it. I'm Adam Lang and this 100 00:05:30,000 --> 00:05:31,039 Speaker 1: is ask Fear and Greed.