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Chapter 23: Problem 5

A column in the New York Times in 2017 noted that Tesla was expanding both its California automobile factory, where it was beginning to produce its Model 3 electric cars, and its Nevada “Gigafactory," where it was producing lithium- ion batteries for cars and other uses. The article quoted an investment analyst as saying, "I don't know what kind of multiplier you put on that, but it's a significant boost to the economy." a. What does the analyst mean by a multiplier? b. Why would Tesla's engaging in this investment spending result in a significant boost to the economy? c. Why might the analyst have been unsure of the size of the multiplier in this case?

Short Answer

Expert verified
The analyst refers to the multiplier effect in economics, illustrating how Tesla's investments could lead to significantly more economic activity beyond the initial investment. The potential economic boost comes from direct and indirect job creation, increased household spending, and more tax revenue. However, the size of the multiplier is hard to ascertain due to many unpredictable factors and variables within the economy.

Step by step solution

01

Understanding the Concept of Multiplier

The word 'multiplier' in economic context refers to how an initial amount of spending can lead to an increase in national income that is greater than the initial amount of spending. It basically describes how a company's investment can cause an increase in economic activity, beyond just the value of the initial investment. In this case, the value of Tesla's investment in factories and other infrastructures is expected to circulate through the local and greater economy, leading to an overall increase in economic activity. The multiplier effect results from the interconnectedness of an economy's sectors.
02

Investment Impact to Economy

Tesla's investment can stimulate economic growth in several ways. Firstly, it could lead to direct job creation in the factories. Secondly, it will stimulate indirect job creation in the industries that support these factories, such as maintenance, shipping, and serving the employees (like food services, childcare etc.). This increase in employment will lead to increased household spending, which further increases demand for goods and services, stimulating more economic activity. In addition, more taxes will be collected which the government can use to improve public services or infrastructure. It's a cyclical process and thus Tesla's investment creates multiple waves of effect, hence 'multiplier'.
03

Uncertainty of Multiplier Size

The size of the multiplier can be difficult to determine because it depends on a variety of factors which can be hard to predict. How much extra spending will the new employees make? How much will other industries benefit and expand as a result of Tesla's investment? How much of the increased earnings will be saved instead of spent? Will the government use the additional tax revenue for further investment in the economy or address budget deficits? All these uncertainties can make determining the exact multiplier challenging. Also, the multiplier can vary depending on the current state of the economy, predicting that accurately can be complex.

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