How accurate is the multiplier?

Just covering the multiplier with my A2 and will be later with my NCEA Level 3 class. Think of the multiplier effect as a still pond. Women’s Football World Cup being held in Australia and New Zealand later this year – the direct impact of spending on the World Cup is like a stone hitting the water and creating ripples which will get smaller and smaller. With spectators coming to Auckland to watch a game they will make additional spending on accommodation, transport, food, tourist attractions etc. Where a hotel makes a lot of money form the event they may chose to extend the numbers of rooms which means they will have to employ contractors who will receive more income. The contractor might spend this additional income on a new vehicle for the business which then adds income to the car dealership – and it goes on with the ripples getting smaller and smaller.

Economic forecasters tend to use a simple formula to estimate the multiplier effect of sports event. They will estimate the number of spectators, how long they will stay and what they, on average, will spend whilst at the event.

Problems of forecasting
Unrealistic projections of the number of visitors or their potential spending will lead to inaccurate multiplier effects. Factors that might overestimate the true economic impact of a sporting event.
Substitution effect: this happens when the spending on a sporting event would have been spent elsewhere in the local economy and therefore doesn’t generate new economic activity.
Crowding out: crowds and congestion may dissuade other economic activity from occurring. For example London Olympics 2012 590,000 visitors arrive in connection with the Olympics but the number of visitors fell by 1 million between summers of 2011 and 2012.
Leakages: higher costs for restaurants, hotels etc associated with hosting the event doesn’t necessarily mean that employees working in those areas will be paid more. Also where there are guest workers from overseas the money is less likely to be recirculated. For some venues on the coast cruise ships have been used but this is only during the event.

Research into the impact of sporting events whether it would be the Champions League Final, World Cup, Olympic Games etc has found there is little short-run economic effect on the host city. The table above shows the research before and after sporting events with conflicting data. Some economists joke that if you really want to know what the true economic impact of a sporting event is, just take whatever number the promoters give you and then move the decimal point one place to the left.

Source: The Economics of Sport (2018) – M. Leeds, P. Von Allmen and V. Matheson

The theory behind the multiplier.
Consider a $300 million increase in business capital investment. This will set off a chain reaction of increases in expenditures. Firms who produce the capital goods that are ultimately purchased will experience an increase in their incomes. If they in turn, collectively spend about 3/5 of that additional income, then $180m will be added to the incomes of others. At this point, total income has grown by ($300m + (0.6 x $300m). The sum will continue to increase as the producers of the additional goods and services realise an increase in their incomes, of which they in turn spend 60% on even more goods and services. The increase in total income will then be ($300m + (0.6 x $300m) + (0.6 x $180m). The process can continue indefinitely. But each time, the additional rise in spending and income is a fraction of the previous addition to the circular flow.

The value of the multiplier can be found by the equation ­1 ÷ (1-MPC)
You can also use the following formula which represents a four sector economy

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