Multiplier Analysis1

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Multiplier Analysis

Kul EWK 3.1

2008/2009


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OVERVIEW The heart of Economic base theory is the proportion that

the economic growth of region ultimately depends onoutside demand for its products

In term of economic base theory there are basic and nonbasic sector

If demand for export o the region increases, the basicsector expand, and generates an expansion in thesupporting activity of the non basic sector

Total Employment=Basic employment+Non BasicEmployment

Total Income=Basic Income+Non Basic Income

The ratio between basic sector and non basic sector iscalled the Base Ratio

The base ratio can be used to calculate base multipliervalue


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What are Multipliers? Coefficient which states multiply of direct effect and indirect

effect, goes from increasing of final sector on one unittoward total production of agregate sectors in certain area.

Multipliers measure total change throughout the economyfrom one unit change for a given sector.


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Three Types of Multipliersare calculated from Model

1. Employment

2. Income3. Output


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The Base Employent Multiplier Changes in total employment, for every one unit changes in basic

employment

Total Employment = Basic employment X Base Multiplier

Formula for estimating:Change in Total employment = Change in Basic employment X BaseMultiplier

Example:

if in particular region, for every worker in the basic sector there are two

worker in the non basic sector, the base ratio will be 1:2, and the basemultiplier will be 3:1

this means that when basic employment increases by one job, it multipliesto a total of three new jobs, including new jobs in both basic and non basic

sectors.

ymentBasicEmplo

ymentTotalEmplolierBaseMultip


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A change in total income for every one unit changes of income in basicsector

Total Income = Basic Income X Base Multiplier

Formula for estimating:

Change in Total Income = Change in Basic Income X Base Multiplier

eBasicIncom

eTotalIncomlierBaseMultip

The Base Income Multiplier


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Regional Income Determination

urcesNonBasicSoIncomeFromoportionOflierBaseMultip

Pr1

1

Regional income is determined by the portions of the four types ofspending:Consumption spending, Investment spending,Government spending, and Exports

In term of economic base theory, it is determined by earning beinggenerated in the basic sector and multiplied through purchases inthe non basic sector

The multiplier reflects the proportion of income that is spent in theregions non basic sector times the proportion of spending in thenon basic sector that in turn generates income in the region

comeNonbasicIneTotalIncometotalIncom

lierBaseMultip


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Since total income results from nonbasic sector spending times the fraction of thatspending that generates regional income, and since non basic sector spending is

itself a proportion of tota regional income, the multiplier formula could be:Regional Base Multiplier=1

1-(Proportion of income spent in the regional nonbasic sector X Proportion that generates regional income)

Changes in total regional income=

(Changes in income regions basic sector X Regional base multiplayer)

Example:

Suppose research Based on sample surveys indicatesd that of each $1.00 of GrossRegional Income, only $0.60 was spent on purchases in the region nonbasic sector,and suppose it was also found that every $1.00 spent in the non basic sector, only $0.50 became regional income, while remaining $0.50 paid for goods imported for salein the origin

1

RBM=

1-(0.6)(0.5)

= 1.43

Values in spending on regional export, investment,

or govt activities can be estimated, hypothesized

and multiplied by RBM, yielding the change in total

regional income


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NOTE

Value of variables which are rationed must be in the same measurement. the prices must on the same year/time

Be cautious in using employment data, because among employments havedifferent weighed values.

so, employment data are often used if they are collected by the direct survey.

The multiplier base value calculated is based on ratio of employment in curentcondition, it maybe will be different from the future condition.

so it is suggested to use value of average change per year, between totalemployment and change in basic employment

The multiplier base value calculated is based on ratio of employment in curentcondition, it maybe will be different from the future condition.

It has the time lag problem, because the base multiplier doesnt workinstantaneusly.


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Advantages in term of planning Can be higly utilitarian tool for exploring, evaluating, and making

rough estimates of trends in employment, revenue, income,population, housing needs, community service needs, and otheraspects of regional complex that are important to analysts anddevelopment planners.

Might be assesing ways the multiplier could be increased by actionsthat reduce different types of leakeges, and for indicative purposescomparing the consequences of these different actions, givencurrent levels of basic spending.

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The Analysis of the impacts of change on host of

economy, through an assesment of the variouslinkages between firms and factor inputs

Keynessian Multiplier Analysis


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Y

EAD2

E2 = Y2YE1 = Y1

D

AD1

The change in

income Yassociated

with any

change inaggregate

demand ADcan be

described asY=k(AD),where kis

multiplier

The multiplier is given by the value of the horizontal shift from Y1 to Y2,

divided by the vertical shift fromAD1 toAD2


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Approaches to Regional Multiplier Analysis(Mc. Cann)

Economic Base Models

Keynessian Regional Income Multiplier Input-Output Analysis


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Keynessian Regional Multiplier

Similar in nature to the economic base multiplier

Assuming that marginal and average input costs remain

constantAssuming that there are no capassity constraints within

the economy

The principe:Multiplication between a change in any ofthe individual component of agregate demand and the

individual change by the value of multiplier will provide theoverall income change, after all the successive round ofexpenditure have taken place
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The Standard Keynessian Income

Agregate Demand Expession

rtrrrr r MXGICY

Yr= Regional Income

Cr= Regional Consumptions

Ir= Regional InvestmentsGr= Regional Government Expenditure

Xr= Regional Exports

Mrt = Regional Imports


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Modification:

= Exogenous Consumptions

= Exogenous Regional Imports

t = The Average Regional Tax Ratethat disposable income after tax is: Yr(1-t)

rr mYMM

C

M

rtrcYCC

rtr tYT

rtr cYT


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tmc

MXGICY

rrr

r

11

The regional income Yr, is thus given as the sumof the exogenous components of aggregatedemand, multiplied by a regional multiplier k, thus

(c-m): the marginal prospensity to

consume locally produced goods

If the value of (c-m)increases, the value ofregional multiplier increases

tmckr

11

1


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If we consider the effect of an increase in any one

of the components of aggregate demand withinthe multiplier framework:

The Greater is the regional value of MarginalProspensity to consume locally produced goods,the greater the value of the regional multiplier, andthe greater is the increase in regional income.

tmc

MXGICY

rrr

r

11

)(


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The differences between national and

regional multiplier model

In term of Investment:

In standard national model, investment dependson issues such as inflation, interest rates, and

expectations.In regional framework, the marginal prospensity toinvest in the local economy may be the function oflocal regional income.

the marginal prospensity for governmentinvestment is a positive function of regionalincome


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In term of expenditure

In National Income-expenditure model

government expenditure (G) is assume to beexogenous income, depending primarily onpolitical issues

Government expenditure in regions is depend on

the level of regional income (tend to be inverselyrelated to the level of regional income)

the absolute level of government expenditure in aregion, tend to increase as greater levels ofinvestment are reqired to provide and maintainlocal public infrastructure such as road, school,hospital, etc.


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References

Bendavid-Val, A., Regional and Local Economic Analysisfor Practitioners 4th edition, Praeger Publishers, One

Madison Avenue, New York, 1991 Mc. Cann, P., Urban and Regional Economics, Oxford

University Press, Great Clarendon Street, Oxford, 2001

Stimson, R.J., et al, Regional Economic Development

Analysis and Planning Strategy, Springer-Verlag BerlinHeidelberg, 2002


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THANK YOU

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