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Economic Impact of a University

December 14, 2011 Leave a comment Go to comments

Michael Cameron – Senior Lecturer in the Economics Dept at the University of Waikato in Hamilton – presented a paper on The Economic Impact of a University. In order to work this out he estimated the size of the multiplier using an input-output model.

But what is the multiplier effect?

$1 of spending in an industry generates more than $1 of total output for the economy. Why?
* That $1 becomes income for the firm that receives it. They will use some of that to pay their suppliers
* Those payments become income for the suppliers, who in turn will use some of that money to pay their suppliers and so on (we refer to these as backward linkages)
* There are also forward linkages (to firms that receive the output from that sector)
* And of course some of the income goes to workers as wage/salary and they save some but spend some too
* All of that adds up to more than $1 of production
*The value of the multiplier can be found by the equations:
– 1 ÷ (1-MPC)
– 1 ÷ MPS+MPT+MPM

To estimate the size of the multiplier effects, economists typically use an input-output (I/O) model. How is this constructed?

*This is an industry-by-commodity matrix which basically shows, for every commodity produced by the economy, which industries supply it (or if it is imported), and which industries use it (or if it is used by households/government as final demand, or if it is exported)
*That gives the basic structure of the economy, which with some wizardry we can construct and industry-by-industry input-output table from.

What is the impact of the university?

Michael Cameron found the following results and values of the multipler for each section.

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