Leakages of multiplier:
1. The multiplier assumes that those who earn income are likely to spend a proportion of their additional income on consumption.
2. But in practice, people tend to spend their additional income on other items. Such expenses are known as leakages.
Payment towards past debts: If a portion of the additional income is used for repayment of old loan, the MPC is reduced and as a result the value of multiplier is cut.
Purchase of existing wealth:
1. If income is used in purchase of existing wealth such as land, building and shares money is circulated among people and never enters into the consumption stream.
2. As a result the value of multiplier is affected.
Import of goods and services:
1. Income spent on imports of goods or services flows out of the country and has little chance to return to income stream in the country.
2. Thus imports reduce the value of multiplier.
Non availability of consumer goods:
1. The multiplier theory assumes instantaneous supply of consumer goods following demand.
2. But there is often a time lag.
3. During this gap (D > S) inflation is likely to rise.
4. This reduces the consumption expenditure and there by multiplier value.
Full employment situation:
1. Under conditions of full employment, resources are almost fully employed.
2. So, additional investment will lead to inflation only, rather than generation of additional real income.
