Balanced Budget Multiplier

What is the likely magnitude of the The “balanced budget multiplier”? The magnitude of either the multiplier or the balanced budget multiplier for the UK will depend on the accuracy of the statistics that are referred to. Moreover, the multiplier for the UK has to account for expenditure increases which are at market prices. As a result, these include import and fact costs which are not part of domestic product. Thus rise in GDP will have to be calculated at factor cost, and should be related to the domestic-output content of expenditure.

The MPC has been estimated at 0.9, and MPZ is 0.32, giving an import-adjusted MPC of 0.58. The multiplier would be thus: 1/(1-(MPC-MPZ) = 1/(1-0.58)=1/0.42=2.4. This, though, takes no account of tax, which is necessary to find the balanced budget multiplier. In 1996, there were three marginal rates of taxation, 20%, 24%, and 40%, but it is likely that the average was 24%. National Insurance is another leakage and thus a form of taxation that also has to be taken account of, and in 1996 it was 9%. This gives a figure of 33% for overall taxation.

The balanced budget multiplier will therefore be: 1/{1-[(MPC*0.77)-0.32]} = 1/[1-(0.693-0.32)] = 1/(1-0.373) = 1/0.627 =1.59 1.59 is likely to be the magnitude for the balanced budget multiplier. Unfortunately, it is only an estimate. It ignores the effects of firms selling or keeping inventories, and there are uncertainties about the accuracy of the data. Moreover, it assumes that unused capital and labour resources can be utilised, where as there may be good reason why they cannot be.

Adapted from Dornbusch/Fischer/Startz, Macroeconomics, Mcgraw-Hill, 2001 Adapted from Begg, Fischer, Dornbusch, Economics, Mcgraw-Hill, 2000Zorba’s Bakeries and Sons Ltd. was created at the village of Athiainou, Cyprus, at the 1st o October 1975 by Mr. Andreas Zorbas. It became a listed Company at the 22nd of November of 1979. The main activity of the Company was the production and delivery of baking products. At the October of 1988, the customer demands “forced” the owner of the Company to take the decision, for opening his first store at Nicosia. At the year of 2000, the Company was running seven (7) shops at the wider area of Nicosia and at the same year it became public. At the 27th of December of 2000 the Company became member of the Cyprus Stock Exchange (C.S.E.).

The whole production is made at the two factories of the Company at Larnaka Industrial Area. The old one is running since 1999 and the new one since 2002. The new premises (an investment of about 6 million pounds) is employing the latest technologies and it is one of the most advance at Europe. The Company is satisfying all the International Quality Standards like ISO 9000 and HACCP (Hazard Analysis of Critical Control Points) for both Production facilities.

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