By Susan Odum Extension Educator Community & Economic Development University of Illinois Extension
As a citizen, how and where you spend your money can have a significant impact on the economy of not only your community, but the entire region and even the State itself. To assist in your understanding, let’s consider a term called the multiplier effect, which defines the number of times that a “dollar” is re-circulated within an economy before it leaves the economy.
To demonstrate, imagine two towns: Loyalton and Drainville. In Loyalton, the people, organizations and businesses are loyal to the community and tend to spend the majority of their money locally (about 75%). In contrast, the people, organizations and businesses in Drainville generally only spend 25% of their monies in the local economy.
Jill lives in Loyalton and her brother Jack lives in Drainville. For Christmas, their aunt gives each of them $40 in cash, since she just didn’t know what to buy. Jill uses $30 to buy herself a bouquet of roses at the local florist and utilizes the remaining $10 to order a new book from Amazon.com. The florist takes the $30 she earned from Jill’s purchase and spends it on a nice dinner at the Loyalton Steakhouse. The florist, in turn, utilizes the remaining $7.50 toward her monthly Netflix bill. The restaurant owner uses the $22.50 from the florist’s dinner tab to buy a bottle of her favorite local wine ($16.88), while spending the remaining $5.62 on a mail order purchase.
Upon receipt of his Christmas gift, Jack immediately goes to the Internet to place an order for the new video game he has been wanting. Luckily, it’s on sale for $30 so he pockets the remaining $10, which he uses to buy lunch at the local Mexican restaurant. The Mexican restaurant owner uses $7.50 from Jack’s lunch bill to pay his monthly Netflix bill. The remaining $2.50 he utilizes to buy an ice cream sundae at the local soda shop. The soda shop owner uses 25% of the $2.50 tab to buy a pack of gum at the local grocery store ($0.62). The remaining money ($1.88) she saves to buy her favorite café mocha drink during her next visit to the mall just across the river in Statesville.
So in summary, Jill received $40 from her Aunt and spent $30 at the local florist; the florist spent $22.50 for dinner at the local steakhouse; and the restaurant owner bought a $16.88 bottle of local wine. As a result of the multiplier effect, an additional $69.38 circulated in the Loyalton economy and a local Loyalton business owner has $16.88 available for the multiplier effect to continue in the community. After 19 transactions, $0.17 still remains in the Loyalton economy as a result of Jill’s $40 Christmas gift and the community’s commitment to spending 75% of their monies in the local economy.
In contrast, Jack utilized $10 of his $40 Christmas gift at the local Mexican restaurant; the restaurant owner used $2.50 to buy ice cream; and the soda shop owner used $0.62 to buy a pack of gum at the local grocery store. After these local transactions totaling $13.12, the local grocery store owner has only $0.62 available for the multiplier effect to continue in Drainville. In keeping with the 25% local spending theory in Drainville, only $0.16 of Jack’s $40 Christmas gift remains for another transaction in the community because of Drainville’s lack of commitment to buying local.
In this scenario, the multiplier effect for Loyalton would be approximately 4, while Drainville’s multiplier would be closer to 1.3. This simplified scenario demonstrates how one relatively small Christmas gift flowing into the local economy to one person can have an impact – a multiplied impact – on the rest of the local economy. It is important to note that it’s not just where you spend your money that matters. It also matters where the people, organizations and businesses you buy from spend theirs. As demonstrated in this example, the quicker the money leaves the community, the smaller the multiplier and the weaker the local economy. In this simplified scenario, we ignored the impact of sales tax generation on the sample transactions outlined, which in reality further magnifies the positive impacts of buying local and further outlines sale tax lost on purchases made outside your region or in other states.
The exercise for each of you is to take a look at your monthly expenditures and calculate the percentage of monies you circulate in the local economy. This will help you determine how your personal buying patterns are affecting the economic vitality of your community, the communities in your region, your State, or perhaps even neighboring states.
Susan Odum, University of Illinois Extension CED Educator for the Southeast Region notes: “If your local expenditures percentage is low, please make a commitment to find opportunities to shift your shopping in support of your local economy. Simple shifts include: buying gasoline at the local gas station; buying groceries at the local supermarket; contracting for insurance with local providers; investing and financing with local financial institutions; contracting for services locally, such as auto repair, haircuts, etc; patronizing local restaurants, pharmacies and specialty stores; and buying large ticket items, such as automobiles, locally.” The multiplier scenario was adapted for this article from the Money Trail: Measuring Your Impact on the Local Economy.
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