The local multiplier effect is an interesting economic theory. The basic idea of multiplication is this. Once an economy (of any size; local, regional or national) is generating enough of its own wealth, it will be capable of growing, just as all economies aim to grow.
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That wealth can be generated in various ways. It might be agricultural output, manufacturing, construction, or provision of goods and services for instance. And the goal with the multiplier effect is to get an upward spiral going that sees the majority of people share in greater prosperity through more opportunities and better-paying jobs.
One potential spark for this upward spiral can be locally-driven, and it comes from the fact that some percentage of the money you spend locally will continue to circulate locally.
The important factor for this is, the more local ownership (capital investment) there is in the entity where you acquired that good or service, the higher that percentage will be.
That means buying from a corporate-owned chain store near you will keep a small percentage of the money locally via the local workers. Such a business might also attract people from neighbouring towns and villages who may spend money nearby as well since they've made the trip anyway, so having any type of local stores are no bad thing even if the local ownership is very small and only through owning shares.
It can be better though. If that business is a locally-owned franchise, the percentage of money that keeps circulating locally goes up noticeably. If the premises is owned locally, that brings the percentage up quite a bit.
If the business sells local produce, or manufactures something in a local factory, that adds to the percentage as well. If they source goods or components or ingredients locally, that also helps lift the percentage.
If a locally-owned business makes goods that are going to be for sale in other areas, or better yet, for international export, they're actually bringing dollars into the community from outside this region.
Actually, bringing dollars in from other areas, whether it be commodities like agriculture, or providing some sort of value for customers, is what really causes that upward spiral of better jobs, better wealth and better living conditions.
Of course, this does not preclude doing trade with the neighbours, regionally or nationally. In fact, if everyone is adding value at some stage of a process, everyone becomes better off, both economically and in terms of all the goods and services they have financial access to that aren't yet available locally. This concept is, after all, the entire reason nations have trading partners. You just need to source things locally whenever it's possible and practical in order to keep this multiplier effect working in your favour.
The belief in this effect is widely held too, across many governments, industries and local business chambers.
Responding in favour of a Kimberly Recovery Plan, "building work creates an economic multiplier effect which flows on to local businesses and the entire community," Master Builders WA executive director John Gelavis said in a statement.
It's not hyperbole either, it's backed up by data. In a Building Jobs report done by the National Housing Finance and Investment Corporation's research unit, they said "Based on our analysis using the latest ABS data, residential construction plays a vital role in supporting jobs both on and off building sites." And that's just one industry as an example.
