Q:
What is the Multiplier Effect of Zakat?
Literally the meaning of Zakat is growth or
increase. To illustrate the multiplier effect in the economy we have,
Marginal Propensity to save (MPS) = Change in
Savings/ Change in income
If somebody receive an extra dollar then how much
perfect the extra dollar will be used for savings.
Now,
MPS+MPC = 1
Here,
MPC= Marginal Propensity to consumption
MPS= Marginal Propensity to save
If we want to find out MPC then,
MPC= 1-MPS
Now the question is how the concept of MPC or MPS
can be aggregated to get the multiplier effect of Zakat.
Note that, Zakat money is given to certain group of
people or Asnaf. The Zakat is given
especially to the group of poor people. For poor people they have higher MPC.
Basically, MPC for the poor group is very high. For
example, when they receive say about $100, they may spend of all hundred dollar
for consumption.
Now point the case,
MPC=1 and
MPS=0
The question is how then when we know that the poor
people have higher MPC, how Zakat given to the poor can boost the economy.
Now once we know how to find multiplier. We know:
Δ in GDP= m* Δ in Initial Spending
Where, Δ= Change in
GDP= Gross Domestic Product
m=multiplier
How we count multiplier. Multiplier is given by
m=1/1-MPC=1/MPS
To understand how much the level of multiplier, we
can lay out as follows:
|
Countries
|
MPC
|
MPS
|
m
|
Δ
in GDP
|
|
Poor
|
0.9
|
0.1
|
10
|
$1000
|
|
Rich
|
0.1
|
0.9
|
1.11
|
$111
|
We know the MPC for poor is very high say 0.9 and
MPS is very low say 0.1 and m is 10.
Now for the rich people,
MPC=0.1 (very low)
MPS= 0.9 (very high) and
m=1.11
How
these can effect in GDP?
Assume initial spending in the
economy is $100. So, in the case of poor people we will give $100 to them from
where they will spend 90% of that. So the change in GDP will be $100*10=$1000.
For the rich people, MPC is just
0.1 and m is 1.11. So the change in GDP will be $111.
Now, we want to emphasize that in
the case of Zakat money. We know that, poor people have higher MPC than rich.
Because of high MPC among the poor Zakat money will be given to ‘Fakir and
Miskin’ that means to the petitioner and the deprived. They have high MPC. And
this tends to connects huge multiplier effects in the economy. Because of that,
we give Zakat money to poor people and they have higher MPC and will affect GDP
as much through m.
In contrast, if money is given to
the poor they will save more and the economy will face low multiplier effect.
This will lead to less change in GDP.
Remember that, one of them (poor)
the Zakat is grow and we can see Zakat leads to huge improvements in the
economy.
Composed
By: Fajila Khatun.