By Susan Odum Extension Educator Community & Economic Development University of Illinois Extension
Imagine the local economy as a pool, nothing fancy, just an ordinary round pool. The water level in the pool is determined by the inflows, outflows and swirling that occur as a result of activities undertaken by the people, organizations and businesses located within the local economy.
Monies flow into the “pool” via the tap from a variety of sources including: government payments; state payrolls; export industries; and through tourism expenditures as visitors exit the interstate highways and spend money at gas stations, convenience stores, restaurants, wineries, hotels, bed & breakfasts, casinos and other select tourist attractions.
Similarly, monies flow out of the local economy via the drain, reducing the level of water in the pool, when the economy’s people, organizations and businesses spend their money outside of the local economy.
In keeping with the “pool” analogy, the goal of the local economy is to collect as much water in the local pool as possible. This can be accomplished by: decreasing the size of the drain; increasing the size of the tap; and/or using the multiplier effect. Local economies can augment the size of the tap by working to recruit, retain and support the growth of existing export and tourism industries. Similarly, economies can decrease the size of the drain by identifying ways to reduce the outflows of monies going down the economy’s drain and into another economy’s tap. One common way to decrease the size of the drain is through implementation of a “buy local” initiative.
Lastly, as monies flow in from the tap, economies can look for avenues to increase the number of times those monies swirl around in the pool before running down the drain as people, organizations and businesses purchase goods and services outside of the local economy. The more times the economy’s monies swirl around in the pool before draining out, the higher the water level, and the bigger the local economy.
This swirling, or recirculation of monies, is referred to as the multiplier effect. The multiplier effect is related to the number of times that a “dollar” is re-circulated in the economy before flowing out as goods and services are purchased outside of the local economy. For example, as businesses bring new money into the economy from the tap, they in turn spend money in the local economy on groceries, haircuts, clothes, etc. which increases income and jobs in the “secondary” sectors. The grocers, barbers and clothing store owners in turn spend some of their increased income locally promoting a third round of job and income creation. The process repeats itself through several spending cycles. Therefore, a dollar of new outside income flowing into the economy’s tap increases local income and economic activity (the water level) by more than just that dollar.
By buying local whenever possible, you can contribute to the re-circulating of monies in the local economy and slow down the drain of resources out of the local economy, thereby contributing to the growth of your local economy. The Pool Analogy was adapted for this article from the Community Development Handbook, copyright 2006 Community Development Council, Inc.
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