How does government infrastructure projects boost GDP ?

Let us take very simple case.

let us assume govt. has to construct a road for public utility.

Cost of a road project is Rs 100.

Expenditure of govt. will be income of somebody . Let us assume that somebody is person A.

Person A saves 20% and spends 80% of his income. This means person A saves Rs 20 and spends Rs. 80.

Here is the interesting part now.

Expenditure of person A will be income of , let us assume, person B.

Person B also saves 20% and spends 80% of his income. This means he saves Rs. 16 and spends Rs. 64.

Expenditure of person B will be income of person C so on and so forth.

As we know that all the expenditure happened in this case will be counted in GDP of a country.

So GDP= 100+0.8 x 100+0.8 x 0.8 x 100 + ...

This is a geometric series and hence total GDP = 100/0.2= 500


So if govt spends 100 Rs on a project  then GDP increases to 500 Rs.

This called a multiplier effect in economics. In this particular case multiplier is 5.

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