, the ripple
effect caused by the re-spending of income
. Money spent in a local economy is re-spent by employee
s and supplier
s, so the multiplier tries to calculate how many times this occurs.
How does this work? Imagine a tourist spends $100 on a hotel room. The hotel owner divides up that money to pay employees and suppliers (say, $60 goes to employees and another $10 to local suppliers). The employees and suppliers go out and spend money (buying groceries, for example) and of that $70, let's say $30 stays in the local economy to shopkeepers, suppliers, etc (induced effect). So the original spending might be calculated to have a multiplier effect of 2 ($100 (direct impact)+ $70 (indirect impact)+ $30 (induced effect)/$100 (direct impact) = 2); meaning that $200 was circulated through the local economy.
Urban and regional planners use the multiplier effect to calculate the net impact of a given or proposed economic activity (One reason that local governments may choose to subsidize developments such as sports stadiums or shopping destinations or arts districts is the expectation that these projects will bring in money to the local economy).
The other method of local economic development that relies on the multiplier effect is
"plugging the leaks," a strategy that encourages consumers to "buy local," thereby keeping money circulating locally. (Locally owned small businesses increase the multiplier effect, while corporate owned chains have a smaller effect as profits are exported out of a local economy to the corporate owner elsewhere).
Vivian C. Choi, "On the Multiplier Effect," Guam Department of Commerce, March 2001, <http://www.admin.gov.gu/commerce/multiplier.htm> (25 March 2002)
Cathy Cockrell, "Professional sports haven't delivered promised benefits ...," UC Berkeley Press Release, 20 August 1998, <http://www.berkeley.edu/news/media/releases/98legacy/08-20-1998.html> (9 April 2002)
Marie Easley, "Measuring Economic Impact," Partners, Spring 1998, Federal Reserve Bank of Atlanta, <http://www.frbatlanta.org/invoke.cfm?objectid=DC6ADC32-8061-11D5-897D00609459DBE6&method=display> (8 April 2002)
Amos Ilan, Richard W. Roper, et. al., "Total Impacts," Council for Higher Education in Newark Economic Impact Report 2000, <http://www.chen-nj.org/total_impacts.htm> (9 April 2002)