Multipliers

It is important that Magnetic Communities understand economic multipliers and how they impact the flow of money and prosperity. When money enters a local economy it can be re-spent many times or exit quickly. As money circulates, spending increases above the original amount, “multiplying” its total economic benefit. Less important to the discussion of Magnetic Communities is the actual numeric value of the multiplier itself. Knowing that local spending retains money and that it is multiplying in value should be enough to focus economic development efforts on attracting and retaining money.

A local economic multiplier is a number (usually between one and three) that helps estimate the total economic impact a community can expect from a change in the local economy. For example, if a local manufacturing facility signs a new contract with an out of town customer, the total local economic impact can be determined by multiplying the increase in income (new money) by the local multiplier. Likewise, if the manufacturer loses a contract to supply goods and services to an outside competitor, the total negative economic impact can be determined by multiplying the decrease in income by the same economic multiplier.

It is important not to confuse money flow and the multiplier effect. A change in money flow is the difference between money flowing into and out of the local economy and determines the amount of money available for spending. The multiplier effect is the total economic impact a community can expect from a change in the local economy.