Local Multiplier Effect

Published Mar 22, 2024

Definition of Local Multiplier Effect

The local multiplier effect refers to the process by which initial spending in a local economy circulates and is re-spent within that local economy, thereby amplifying the overall economic impact. This concept highlights the significance of local spending and its ability to generate additional economic activity beyond the original expenditure. The more times money passes through different hands within the community—rather than being spent outside—the greater the local economic benefit, including job creation and increased local wealth.

Example

Consider a small town with a locally-owned coffee shop. When a customer spends money at this coffee shop, the owner, in turn, might use some of that money to pay a local bakery for fresh bread. The bakery might then spend that income on ingredients from a local farmer. The farmer spends a portion of this income in the same town, paying a local mechanic for equipment maintenance. This cycle continues, re-circulating the initial spend multiple times within the local community, creating a multiplier effect.

This contrasts with spending at a national or international chain business, where much of the profit and a portion of the spending might exit the local economy to pay external suppliers or corporate salaries elsewhere, reducing the local multiplier effect.

Why the Local Multiplier Effect Matters

The importance of the local multiplier effect lies in its power to strengthen local economies. By focusing on bouncing the currency within the local ecosystem, communities can enhance economic resilience, support local employment, and foster a sense of community.

Higher local multipliers can stimulate local growth and development, prompting entrepreneurs to start new businesses, which further enriches the community. Additionally, money that stays locally is more likely to contribute to public goods and services that benefit the community, such as schools and parks.

Frequently Asked Questions (FAQ)

How can the local multiplier effect be increased?

Boosting the local multiplier effect involves encouraging residents and local businesses to buy locally produced goods and services. Communities can also support policies and practices that favor local procurement by businesses and government agencies. Furthermore, fostering local business networks and collaborations can help keep money circulating within the local economy.

Is the local multiplier effect relevant in all types of economies?

Yes, the local multiplier effect is relevant across different economies, from small towns to large cities. Its impact might vary based on the economic structure and the presence of local businesses capable of meeting the needs of the community. Rural areas, in particular, can benefit significantly as they often have closer ties within the community and a smaller base of local businesses.

Can online shopping impact the local multiplier effect?

Yes, online shopping can have a negative impact on the local multiplier effect by diverting spending away from local businesses to national or international companies. This reduces the amount of money circulating within the local economy, potentially leading to economic challenges for local businesses. Supporting local businesses through online platforms that specifically cater to local consumers can help mitigate some of these effects.