George Rebane
With the worldwide economic downturn that is being amplified by the mavens in Sacramento, there is a lot of interest and attention paid to local economies. Here we are trying hard to keep existing businesses (by buying locally) and at the same time attract more firms or cash importers to our community. In this piece I attempt to give a working understanding of the ‘output multiplier’ which summarizes the economic effect on a (local) economy from the arrival of an imported dollar. (A more general discussion of multipliers is available in this short pdf Download EconMultipliers.)
It’s long been known that every dollar that comes into a local economy produces more than just a dollar’s worth of benefit to the community before it leaks back out. This benefit is calculated using the so-called ‘Output Multiplier’ or simply ‘multiplier’ which is just a number like 1.83.
The total benefit of an imported dollar is then equal to the multiplier in dollars – for example $1.00 * 1.83 = $1.83. It’s as if the multiplied dollar amount was actually making the rounds in the local economy. The reasoning behind such a multiplier is easy to understand. Say, a retired person living here gets a check from a pension plan or an investment account. Depending on her lifestyle, she may spend 60% (the retention factor) of her check in the community and the remaining 40% (the leakage factor) for expenses that are outside the community – for example state and federal taxes, online shopping, a big box store in the next county, and so on.
If we now assume that she’s a pretty typical spender, then we see that the 60% of the cash that stayed in the county will be spent in such a way that 60% (or 0.6 * 0.6 = 0.36 = 36%) of that cash also stays in the community, and so on until all the money leaks back out of the local economy. The question now is, what is the sum of all the diminishing pieces or percentages of that imported dollar that benefit the local economy – that is the multiplier number that we seek.









