International trade multiplier. Foreign trade multiplier in the balance of payments Foreign trade multiplier formula
3. Trade balance. Foreign trade multiplier
Products sold abroad are called exports. Its volume is determined by the demand of the foreign sector for domestic products. It depends on many factors, among which the terms of trade and the exchange rate play an important role. The terms of trade is the ratio of the export price index of all exported goods to that of imported goods: T=Pe /R. Raise Re relatively R, means better terms of trade for the country. With the same volume of exports, the country can import more goods. There is an increase in the real income of the state. The export function of a given country can be represented as:
Where EP - offline export; - marginal propensity to export, reflecting the change in the volume of exports depending on the terms of trade (T) and exchange rate (e).
The overseas sector also has an impact on the economy of a given country through the sale of goods in its national market. For the sake of simplicity, we assume that the volume of imports is perfectly elastic. This means that at a given price level, foreign producers will satisfy any demand of the population of a given country for imported goods. All imports are consumer goods. The demand for imported goods depends on the same factors as the demand for export goods. Therefore, the Keynesian import function is represented by the equation:
where Z () is the value of imports independent of the size of income; Z is the marginal propensity to import. It shows how much imports will increase if income per unit increases. Under normal conditions Z < С.
In the neoclassical concept, the volume of imports is a decreasing function of the interest rate: Z - - Z /, where Z is a coefficient showing how much the volume of imports will decrease with an increase in the interest rate by one point.
The difference between exports and imports is net exports ( NE ). It is reflected in the country's trade balance. At the same time, net exports equal output minus absorption based on domestic goods and imports. The trade balance depends on many factors: the terms of trade, the exchange rate, changes in the income of citizens of the country and abroad. Thus, an improvement in the terms of trade, an increase in the exchange rate improve the country's trade balance, as they lead to a shift in demand from foreign-made goods to domestic ones. Income growth in the country increases the consumption of imported products and, consequently, worsens the trade balance. An increase in national income abroad, other things being equal, improves the balance of trade. On fig. 30.1 the schedule of pure export is presented. It is built for a given level of income abroad and the real exchange rate. The net export curve is downward sloping as income growth leads to an increase in imports. The low level of national income in the country leads to a positive trade balance, since the consumption of imported goods is negligible. As income increases, purchases of imported goods increase. At some point, net exports are zero, then the trade balance becomes negative. The slope of the graph of net exports depends on the marginal propensity to import. An increase in foreign income leads to an increase in exports and an upward shift in the net export curve to the right. The consequences of a real currency depreciation are similar. On the contrary, the real appreciation of the national currency leads to a reduction in net exports at each level of national income in the country and a downward shift of the graph to the left.
-NX
Rice. 30.1. net export chart
Difference between Keynesian and neoclassical models that determine the volume of demand for imported goods, leads to the fact that when applying the first concept, there is an inverse relationship between national income and the value of imports. On the one hand, the volume of imports affects the value of aggregate demand, on the other hand, the amount of consumption of imported goods depends on the national income produced. The presence of a relationship between these two variables sets in motion a multiplier effect.
Let's consider this effect in more detail. Foreign buyers influence the size of the national income in the country, varying the value of export purchases. On the one hand, an increase in exports leads to an increase in national income. On the other hand, imports should be treated as leaks. An increase in purchases of imported goods leads to a decrease in national income. Since part of import purchases depends on it, their value affects the value multiplier autonomous spending. Similarly to the multiplier of investments and government spending, we can derive the value of the multiplier, taking into account foreign trade:
MK, = 1/(5 + Z„), (6)
more S - marginal propensity to save; Z, - marginal propensity to import: 0 < Z < 1.
Then the impact of changes in autonomous spending on the volume of ND produced, taking into account foreign trade, can be described by the formula:
AY \u003d 1 / (5 + Z) A (A + NX),
Where AA - change in autonomous spending. If export is an exogenous parameter, then its change has a multiplicative effect on the economy. This process becomes more complicated in the two-country model. In it, the export of one country is the import of another, and vice versa. Then both exports and imports become dependent on the national income of the country. In this case, the multiplicative process is enhanced.
A graphical interpretation of the influence of the multiplier, taking into account foreign trade, on the size of the national income is shown in fig. 30.2.
It depicts "Keynesian cross". All points of the line ABOUT E, which has an angle of inclination of 45°, correspond to the equilibrium values of the national income. With net export NX {) aggregate demand will be satisfied by output Y (y Increase in net exports by A NX pushes up the aggregate demand curve for distance& NX. As a result, to maintain equilibrium, production must reach Yr Growth in production L U pre increases the growth of net exports A NX. The effect of the foreign trade multiplier is temporary, fading.
22 "Economic theory"
*a "I
Rice. 30.2. The effect of the foreign trade multiplier
Since a significant part of trade is carried out on credit, there is a discrepancy between the indicators of trade, determined on the basis of the crossing of goods across national borders, and monetary payments for them. Statistical reporting authorities use customs data on foreign trade transactions to compile the balance of trade. The volume of exports is usually calculated in US dollars and in FOB 1 prices; import volume - in CIF prices 2 .
The value of the trade balance for a country depends on its place in the world economy, international specialization and cooperation, and the economic policy pursued. For Third World countries, a trade surplus is often the only source of foreign exchange to pay interest on international loans. For many OECD countries, the trade surplus is a source of capital outflow and the creation of manufacturing subsidiaries abroad. A negative trade balance serves as an indicator of the uncompetitiveness of the national industry. Maintaining a passive trade balance for a long period of time will lead to a deterioration in the economic situation in the country and lower public welfare. The exception is the economy of large highly developed countries, such as the United States. Since 1971, they have had a trade deficit. However, it is compensated by the inflow of foreign capital and a positive balance in other items of the balance of payments.
(foreign trade multiplier) The effect that an increase in domestic demand has on a country's foreign trade. The primary effect is that this entails an increase in the import of raw materials into the country. The secondary effect may be to expand exports, because increased domestic increases the competitiveness of industrial producers, and also because countries that supply more and more imported products receive growth to expand their own imports.
Business. Dictionary. - M.: "INFRA-M", Publishing house "Ves Mir". Graham Bets, Barry Brindley, S. Williams et al. Osadchaya I.M.. 1998 .
The Foreign Trade Multiplier is a coefficient that characterizes the impact of additional exports of goods and services, foreign investment on foreign . Income thus increases to a greater extent than goods, services and capital.
Dictionary of business terms. Akademik.ru. 2001 .
See what the "Foreign Trade Multiplier" is in other dictionaries:
- (foreign trade multiplier) The ratio of domestic product due to an increase in exports to the increase in this export. The multiplier is described not by one specific formula, but by a number of formulas. In the case of the simplest economy, when ... ... Economic dictionary
- (foreign trade multiplier) The effect that a country's foreign trade has on increasing domestic demand. First of all, this entails an increase in the import of raw materials into the country. A secondary effect could be an increase in exports as increased... ... Financial vocabulary
Foreign trade multiplier- FOREIGN TRADE MULTIPLIER Expansion of the country's foreign trade activities as a result of growing demand in the domestic market. An increase in demand has a double effect: it increases the demand for imports by an amount equal to the marginal propensity ... ... Dictionary-reference book on economics
FOREIGN TRADE MULTIPLIER- coefficient characterizing the impact of additional exports of goods and services, foreign investment on external income ... Big Economic Dictionary
FOREIGN TRADE MULTIPLIER- - coefficient characterizing the impact of additional exports of goods and services, foreign investment on external income. The essence of the multiplier effect is that income increases to a greater extent than the export of goods, services and ... ... Economics from A to Z: Thematic guide
- (export multiplier) See: foreign trade multiplier. Economy. Dictionary. Moscow: INFRA M, Ves Mir Publishing House. J. Black. General editorial staff: Doctor of Economics Osadchaya I.M.. 2000 ... Economic dictionary
The ratio of the increase in national income caused by exports to the increase in exports itself. In English: Export multiplier See also: Multipliers Regulation of foreign trade Financial Dictionary Finam ... Financial vocabulary
- (Kaldor) (1908 1986), English economist, representative of neo-Keynesianism. Proceedings on the problems of economic growth, employment and inflation. * * * KALDOR Nicholas KALDOR (Kaldor) Nicholas (1908 1986), an English economist of Hungarian origin, ... ... encyclopedic Dictionary
Emission- (Emission) Emission is the issuance of money and securities into circulation The general concept of emission, money emission, emission of securities, connection between emission and inflation Contents >>>>>>>>>> Encyclopedia of the investor
money supply- (Money supply) Money supply is cash in circulation and non-cash funds in bank accounts The concept of money supply: money supply aggregates M0, M1, M2, M3, M4, its liquidity, cash and non-cash ... ... Encyclopedia of the investor
A multiplier in economics is usually called a certain financial effect, which shows an increase in one economic value with an increase in any other. Consequently, foreign trade will show an increase in the scale of foreign trade relations of a certain state with the growth of some indicator within the country. In this case, this indicator will be the level of demand for certain goods and services.
In a narrower sense, the foreign trade multiplier is a coefficient that shows the percentage of growth in government revenues with an increase in the number of exported products.
The value of the foreign trade multiplier and its main forms
An increase in demand for goods or services within the state will become an incentive to increase production, and an increase in production will require the receipt of more resources. In countries such as the Russian Federation, resources are mined domestically, while in most others, resources are imported from abroad. Therefore, the first value of the foreign trade multiplier is to increase the import of imported raw materials. Economists call this value "primary".
"Secondary" meaning arises with a deeper development of international relations. An increase in demand leads to an increase in the number of producers. So that the level of competition does not become critical, some manufacturers begin to focus their activities on foreign markets - goods begin to be exported from the state. The secondary value may not always be observed, while the primary value takes place almost constantly.
The import of raw materials into the state and the export of goods form a variety of foreign economic relations that lead to an increase in the gross income of the state. The third value of the foreign trade multiplier is to increase government revenues through taxes on the export of certain goods.
The fourth meaning is that the development of international relations with the multiplier effect necessarily affects the exchange rate of the state currency, as a rule, the exchange rate will begin to strengthen. If there is an increase in the scale of economic interactions, this will not only lead to the strengthening of the currency, but also increase the country's authority on the world stage.
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Consider the assumptions of the Keynesian model with international trade.
1. There is no state, then Y=C=I+X N.
2. Investments are autonomous.
3. Consumption is a linear function of income.
4. Export is autonomous, i.e. the demand of the outside world for domestic goods does not depend on the volume of national production ( X=X 0).
5. Import is a linear function of income, i.e. the ability of a society to buy foreign goods depends on the volume of national production:
Z=Z0+MPM*Y, Where Z0– offline import , i.e. its minimum required volume, MPM– marginal propensity to import - shows how much the nation's import changes when income changes by one monetary unit: MPM=DZ/DY.
Net export function: X N = X–Z=X0–Z0– MPM*Y.
Equilibrium condition is the equality of income and the sum of consumption, investment and net exports:
Y= C 0 +MPC*Y +I 0 + X 0 - Z 0 -MPM*Y=
\u003d C 0 + I 0 + X 0 - Z 0 + MPC * Y -MPM * Y \u003d
\u003d C 0 + I 0 + X 0 - Z 0 + Y * (MPC -MPM) \u003d A 0 + Y * (MPC -MPM),
Where A 0 - autonomous spending.
Solving the equation for income, we obtain the equilibrium income:
Where m x – simple foreign trade multiplier.
The increase in equilibrium income exceeds the increase in investment (or exports, or both) that caused it, and the ratio of these increases is equal to simple foreign trade multiplier .
The simple foreign trade multiplier is smaller than the simple multiplier. The higher the MPM, the more international trade weakens the multiplier effect. Therefore, by buying imported goods, we contribute to the economic growth of other countries.
Consider a situation where only two countries participate in international trade: A and B. Then the imports of one country are equal to the exports of the other, and vice versa. The increase in investment in camp A will give rise to an endless series of successive events.
1. Income in country A will increase as a result of investment multiplication.
2. Imports in country A will increase (assumption 5), exports in country B will increase by the same amount.
3. Income in country B will increase as a result of the multiplication of the increase in exports.
4. Imports in country B will increase, exports in country A will increase by the same amount.
5. Income in country A increased as a result of the multiplication of the increase in exports, etc.
It follows that the increase in investment in country A generates both a direct increase in its income (in paragraph 1) and an indirect increase (in paragraph 5 and further). Thus, in the case of trade between two countries, the ratio of the increase in income to the increase in investment is greater than the simple multiplier of foreign trade. This ratio is called the complex multiplier of country A's foreign trade with country B and is calculated by the formula:
m AB=m A /(1-m A* m B *MPM A * MPM B),
Where m A, m B – simple multipliers of foreign trade,
MPM A , MPM B are the marginal propensities to import in countries A and B, respectively.
Similarly, the complex multiplier of country B's foreign trade with country A is determined.
Example 1 In both countries A and B MPC=0.8, MPM A=MPM B=0.3. The increase in investment in country A amounted to $10 billion. Find the increase in income in both countries.
Solution:
m A \u003d m B \u003d 1 / (0.2 + 0.3) \u003d 2,
m AB=m A / (1-m A * m B * MPM A * MPM B) \u003d 2 / (1-2 * 2 * 0.3 * 0.3) \u003d 3.1.
In country A: the increase in income is DY=m*DI=3.1*10=31 (billion dollars), and the increase in imports is DZ=MPM*DY=0.3*31=9.3 (billion dollars).
In country B: export growth is DX=9.3 (billion dollars), and income growth is DY= m* DX = 3.1 * 9.3 = 28.8 (billion dollars).
Example 2 A country A can exchange products with one of four countries, for each of which the table shows the values of the marginal propensity to consume and the marginal propensity to import. When exchanging with which country, the multiplier effect of investment spending will be the greatest?
| A country | IN | WITH | D | E |
| MRS | 0,7 | 0,8 | 0,9 | 0,6 |
| MPM | 0,4 | 0,5 | 0,3 | 0,2 |
Solution:
Let us define a country for which the complex multiplier of the country's foreign trade A with this country will be the largest.
From the formula for the complex multiplier of foreign trade it follows that for given values of the simple multiplier of the country's foreign trade A and marginal propensity to import in the country A the value of the compound foreign trade multiplier is completely determined by the product of the simple foreign trade multiplier and the marginal propensity to import in the other country with which the country A plans to exchange products. The larger this product, the larger the complex foreign trade multiplier.
Calculate this product for the country IN. The simple multiplier in this country is m=1/(0.3+0.4)=1.43.
The product of a simple foreign trade multiplier and a country's marginal propensity to import IN equals
(m*MPM)= l.43*0.4 = 0.57.
Let us make similar calculations also for countries C, D And E. Let's write down the received results in the table.
| A country | IN | WITH | D | E |
| m | 1,43 | 1,43 | 2,50 | 1,67 |
| m*MPM | 0,57 | 0,71 | 0,75 | 0,33 |
Because in the country D work ( m*MPM) is maximum, the corresponding compound foreign trade multiplier is also maximum. Therefore, the multiplier effect in the country A when trading with a country D will be the largest.
TASKS
1. In countries A and B, the marginal propensity to consume is 0.9, and the marginal propensity to import is 0.1 and 0.4, respectively. The increase in investment in country B amounted to $ 20 billion. Find:
A) increase in income in country B;
b) income growth in country A;
V) increase in imports in country A;
G) increase in consumption in country B.
2 . It is known that with an increase in national income from 80 to 90, consumption increases from 42 to 48, and imports from 10 to 12. The actual increase in investment is 2. Find:
A) marginal propensity to import;
b) foreign trade multiplier;
V) growth of national income;
G) increase in imports;
e) the increase in national income if the marginal propensity to import increases by 1.5 times. Make a conclusion.
3. Consumption function С=4+0.6Y; import function Z=2+0.4Y 0.5 , where Y is the national income. Find:
A) simple multiplier;
b) the formula for the dependence of the marginal propensity to import on income;
V) marginal propensity to import for the income change interval from 4 to 9;
G) the formula for the dependence of a simple foreign trade multiplier on income.
4. We consider a system of two countries that exchange products. Increase in investments in country A by 20 billion rubles. leads to an increase in its income by 40 billion rubles, consumption - by 36 billion rubles. Increase in investments in country B by 20 billion rubles. leads to an increase in its income by 60 billion rubles, consumption - by 42 billion rubles, imports - by 6 billion rubles. Find the marginal propensity to import in each country.
TESTS
1. Import depends:
2. Export depends:
3. The marginal propensity to import is equal to:
a) the ratio of imports to income;
b) increase in imports with an increase in income per unit;
c) the ratio of import growth to export growth;
d) increase in income with an increase in imports per unit.
4. The simple foreign trade multiplier is equal to:
a) increase in income with an increase in imports per unit;
b) the ratio of income to imports;
c) the ratio of income growth to export growth;
d) increase in income with an increase in net exports per unit.
5. A simple foreign trade multiplier is given by the formula:
7. The foreign trade multiplier is 4. Investment increased by 70, and exports decreased by 90, then income:
8. In an exchange between two countries, the export of country A depends on:
9. The demand for imports in country A depends on:
10. The complex multiplier of country A's foreign trade with country B does not depend on:
a) from marginal propensity to import in a country IN;
b) marginal propensity to save in a country IN;
c) the marginal propensity to exchange internationally in country A;
d) marginal propensity to consume in country A.
11. Simple Foreign Trade Multiplier:
a) more complex foreign trade multiplier;
b) less than a simple multiplier;
c) more balanced budget multiplier;
d) less than one.
Control questions
1. Keynesian functions of consumption and savings.
2. Neoclassical functions of consumption and savings.
3. Investment demand. Investment functions.
4. Demand of the state and abroad.
5. Conditions of macroeconomic equilibrium:
a) income-expenses;
b) Keynesian cross.
6. Recessionary and inflationary gap.
7. Multiplier models. Autonomous spending multiplier.
8. The paradox of thrift. Accelerator.
Creative Lab
1. Macroeconomic problems of the development of the market for goods and services in Russia.
2. Functions of consumption in modern neo-Keynesian theory.
3. Investment policy in Russia.
BUDGET AND TAX POLICY
2.4 Foreign trade multiplier
With an increase in exports, national income increases even if there is no change in the price level. Some of this increased income will be used by people to purchase more imported goods. Thus, thanks to an increase in national income, an expansion of exports, within certain limits, directly causes an increase in imports, whether prices have changed or not. But if we analyze in detail the actions of the foreign trade multiplier with an increased national income, we will see that the derivative increment of imports is not equal to the initial increase in exports, but only a part of it. Let us turn to the analysis of the action of the foreign trade multiplier. An increase in exports, like an increase in domestic investment, will lead to an increase in income depending on the value of the multiplier. Let us assume that new export orders of $1 billion placed among the UK machine tool factories will lead to an increase in revenues of $1 billion. Then workers and entrepreneurs will probably spend 2/3 of their new income on consumer goods in California; in turn, 2/3 of this additional income will also be spent. This process will stop only after the total is $3 billion, i.e. 3=1/(1-2/3), or equal to $2 billion in subsequent consumer spending plus $1 billion in primary spending. International trade not only brings the export multiplier into play; it has another important consequence. Suppose an increase in income increases imports by, say, 1/12 of each additional dollar; this means that an increase in imports, like an increase in savings, will lead to the damping of the multiplier process and, consequently, to the cessation of income growth. Imports act as a "leakage", just like the marginal propensity to save. If you apply the analysis of the foreign trade multiplier to a small city or small country, you will find that the impact of the multiplier in this area is almost imperceptible, since most of the additional income is leaked to other areas. Introducing foreign trade into the multiplier analysis, economists claim that within a short period of time an increase in exports need not be followed by an increase in imports, and therefore an increase in the volume or value of exports will generate income without increasing the amount of available goods, and thus starts an upward swing. This statement means that the growth of exports has a stimulating effect only if it leads to an excess of exports over imports, or if this growth is not immediately canceled out by an equal increase in imports. Further, a distinction is made between what are called autonomous and effect changes in imports. The difference is important. Effective changes in imports are those changes that are caused by previous changes in income. Autonomous changes are changes caused by other factors, such as customs tariffs and other protective measures, depreciation of the currency, changes in consumer demand. The concepts of the foreign trade multiplier and the marginal propensity to import are not new, as the ideas behind them can be traced back to the history of economic thought in the past. It was put forward by Keynes. However, it is based on an old idea. An increase in imports driven by rising incomes is an integral part of the classical model of international trade. A further innovation consists mainly in assuming a fairly constant relationship between changes in income and in imports. Traditional theory does not attempt to establish a stable relationship, but argues that the proportion in which changes in income cause changes in imports depends on many other factors, including the volume of employment in the country, and that therefore the question of how much the phase of the cycle this occurs is important. If a high level of employment is reached (close to the high point of the cycle), then income growth will lead to a sharper increase in imports than if there is a strong stagnation and unemployment. Thus, the new theories of international trade attempt to analyze in concrete terms the consequences of moving from one state of equilibrium to another, while traditional theories were more concerned with describing states of equilibrium and tended to underestimate transition processes.
2.5 The essence and mechanism of the bank multiplier
With the existence of a two-tier banking system, the emission mechanism operates on the basis of a banking (credit, deposit) multiplier.
The bank multiplier is the process of increasing (multiplication) of money in the deposit accounts of commercial banks during their movement from one commercial bank to another. Banking, credit and deposit multipliers characterize the multiplication mechanism from different perspectives. The banking multiplier characterizes the process of animation from the standpoint of the subjects of animation. Here the answer to the question is given: who multiplies money? This process is carried out by commercial banks. One commercial bank cannot multiply money, it is multiplied by the system of commercial banks. The credit multiplier reveals the engine of the multiplication process, that multiplication can only be carried out as a result of lending to the economy. The deposit multiplier reflects the object of the multiplication - money in the deposit accounts of commercial banks (it is they who increase in the process of multiplication). How does the bank multiplier mechanism work? This mechanism can exist only in conditions of two-level (or more) banking systems, and the first level - the central bank manages this mechanism, the second level - the commercial bank forces it to act, and to act automatically, regardless of the desire of the specialists of individual banks. The bank multiplier mechanism is directly related to the free reserve. Free reserve is a set of resources of commercial banks, which at a given time can be used for active banking operations. This concept came to Russia from Western economic literature. It should be noted that it is not entirely accurate. In fact, free (operational) reserves of commercial banks are their liquid assets, but the definition shows that this concept refers to resources, i.e. liabilities of commercial banks. This concept is based on the fact that commercial banks can carry out their active operations (issue loans, buy securities, currency, etc.) only within the limits of their available resources. The free reserve of the system of commercial banks is made up of the free reserves of individual commercial banks, therefore, from an increase or decrease in the free reserves of individual banks, the total amount of the free reserve of the entire system of commercial banks does not change. The value of the free reserve of an individual commercial bank (11) where is the capital of a commercial bank; - attracted resources of a commercial bank (funds on deposit accounts) - a centralized loan provided to a commercial bank by the central bank; - interbank credit; - deductions to the centralized reserve, which is at the disposal of the central bank; - resources that have already been invested in the active operations of a commercial bank. Let's consider the mechanism of the bank multiplier using a conditional example (Fig. 1. the amount of credit and deductions are given in million rubles), and for simplicity we will make three assumptions: ü commercial banks do not currently have free reserves; ü each bank has only two clients; Banks use their resources only for lending operations. Customer 1 needs a loan to pay for supplies from customer 2, but bank 1 cannot lend to him because he has no free reserve. Bank 1 applies to the central bank and receives from it a centralized loan in the amount of 10 million rubles. He forms a free reserve, which is used to issue a loan to client 1. Client 1 pays for the delivery to client 2 from his current account. As a result, the free reserve in bank 1 is exhausted, but a free reserve appears in bank 2, since client 2 keeps his current account in this bank, and attracted resources (PR) of this bank increase. Part of the free reserve bank 2 puts at the disposal of the central bank in the form of deductions to the centralized reserve (CRR). We conditionally accept the rate of such deductions in the amount of 20% of the attracted resources. The remaining part (8 million rubles) of the free reserve is used to provide a loan in the amount of 8 million rubles. client 3. Client 3 pays off this loan with client 4 served by commercial bank 3. Thus, this bank already has a free reserve, while bank 2 has it disappearing. Bank 3 part of the free reserve 1.6 million rubles. (20% of PR) deducts to the centralized reserve, and the rest - 6.4 million rubles. is used to issue a loan to client 5. At the same time, the money on the current account of client 4 remains intact. Client 5, using a loan received from bank 3, pays off with client 6, transferring them to his current account opened with bank 4. Hence, the free reserve disappears in bank 3: it appears in bank 4. Again, 20% of this reserve (1.3 million rubles) is allocated to the centralized reserve, the rest is used to issue a loan in the amount of 5.1 million rubles. to client 7, who uses this loan to pay off client 8, whose settlement account is in commercial bank 5. The free reserve of commercial bank 4 disappears (although the funds in the settlement account of client 6 remain unspent), it appears at commercial bank 5. In turn, this bank is part of its free reserve - 1 million rubles. (20% of PR) leaves in the central bank in the form of deductions to the centralized reserve, and the rest (4.1 mln. rubles) is used to issue a loan to client 9. Then the process continues until the free reserve is completely exhausted, which eventually accumulates in the central bank due to deductions to the centralized reserve and reaches the size of the initial free reserve (10 million rubles in bank 1). In accordance with the scheme, the money on the settlement accounts of clients 2, 4, 6, 8, etc. (all even-numbered customers) remain untouched and therefore the total amount of money on current accounts (deposit) accounts will ultimately be a value many times greater than the initial deposit - 10 million rubles, formed when a loan was issued to client 1. However, the money on deposit accounts can increase no more than 5 times, since the value of the multiplication factor, which is the ratio of the money supply formed in deposit accounts to the value of the initial deposit, is inversely proportional to the rate of deductions to the centralized reserve. Thus, if the rate of contributions to the centralized reserve is 20%, then the multiplier will be 5(1/20*100). It will never reach 5, because a part of the free reserve is always used for other, non-credit transactions (for example, there must be money in the cash desk of any bank for cash transactions). Since the multiplication process is continuous, the multiplication factor is calculated for a certain period of time (a year) and characterizes how much the money supply in circulation has increased over this period of time.
The bank multiplier operates regardless of whether loans are granted to commercial banks or they are provided to the federal government. In this case, the money will go to budget accounts in commercial banks, and they also refer to attracted resources (PR), so the free reserve of commercial banks, where these accounts are located, will increase and the bank multiplier mechanism will turn on. The bank multiplier mechanism will work not only from the provision of centralized loans. It can also be involved in cases where the central bank buys securities or currency from commercial banks. As a result of this, the resources of banks invested in active operations decrease, and the free reserves of these banks used for credit operations increase, i.e. the mechanism of bank multiplication is activated. The central bank can also turn on this mechanism when it reduces the rate of contributions to the centralized reserve. In this case, the free reserve of the commercial banking system also increases, which, other things being equal, will lead to an increase in lending and the inclusion of a bank multiplier. Management of the mechanism of the bank multiplier, therefore, the emission of non-cash money is carried out exclusively by the central bank, while the emission is carried out by the system of commercial banks. The Central Bank, controlling the mechanism of the banking multiplier, expands or narrows the issuing capacity of commercial banks, thereby performing one of its main functions - the function of monetary regulation.
