Izandla Ziyagezana (Explaining the Multiplier Effect)

Have you ever wondered where your money comes from and where it’s going after it has left your hands? I mean knowing who had your note before you as well as knowing who will have it after you is irrelevant, however knowing the power of the circulation money is important.

After participating in a 15km walk for a good course, I decide to go unwind and get myself an ice cold virgin strawberry daiquiri at one of the restaurants in Johannesburg. I used a portion of my income to pay the restaurant; which would form part of income to the restaurant owner, who will use it to pay the waiter serving me. The waiter will use his salary to pay for his rent to his landlord, who will use it to repay his home loan to bank.

In this case, the money has return to the bank and all of us (the restaurant owner, the waiter, the landlord and I) have benefited from me swiping my bank card to pay for a drink. As much as we do not have that money anymore, every one of us did what they wanted to do with the money, leaving us feeling very optimistic about the future because we were slightly well-off than we were and we know this cycle will occur again.

In economics this is called the multiplier effect, where an increase in spending produces an increase in national income and consumption greater than the initial amount spent. Meaning your decision to spend will result in income for another person, and so on. In this instance spending is good as it impacts on other people’s well-being and grows the economy.

Therefore next time you make the decision to spend, think of what a nice contribution you’ll be making to society and the state of your economy. (LOL) I know it sounds like I’m encouraging spending whereas financial advisers will tell you to tighten your belt, however how, on what and when you spend your money is a different topic and it’s definitely none of my business.

All I’m trying to say is “izandla ziyagezana”, which is a Zulu proverb that means we need each other. Therefore an increase in spending is needed to increase income, thus this ripple effect of money circulation is how money is created.

References

Multiplier effect. Dictionary.com

http://www.dictionary.com/browse/multiplier-effect

Thanks to Sagoema Maredi for inspiring the topic