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More of chapter 7

More of chapter 7. The multiplier.

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More of chapter 7

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  1. More of chapter 7

  2. The multiplier A story: Say every week you go to The Max on Thursday night and you always spend $10. You also do lots of other things during the week. Other people do similar things. People at The Max make money and they spend money. Some may save some of the money they make. When you look at all of Wayne after a month or a year you see that income is earned and people use that money to buy goods and services and maybe save some of the money. Now say that your grandmother sends you a check for $50 because you have been out of her hair for a long time and she just thought about how happy that made her so she sent a check (sorry, maybe she sent the check for another reason).

  3. The multiplier You decide to take the whole $50 bucks and spend it at The Max on the next Thursday, in addition to the $10 you always spend. These means folks at The Max will have $50 more than normal in income. What do they do with this money? Let’s say from this point on that any new money earned will lead to the earner spending 90% of it and saving 10%. Let’s say the folks at The Max decide to get a tan at The Undercut and they buy $45 worth of tanning services. This would not have happened had your grandmother not given you 50 buck.

  4. The multiplier So now the people at The Undercut have $45 and they decide to go to The Magic Wok and get $40.50 of a egg a fu young – it is really yummy! The Magic Wok people would not have had this money had your grandmother not sent you the 50 buck. The Magic Wok folk in our story here will buy some stuff and this will go on and on. SO we had you spend 50 buck from your grandmother, The Max people spend 45 buck at The Undercut, The Undercut dudetts spend 40.50 at The Magic Wok, and The Magic Wok folk…..

  5. The multiplier So the new spending adds up to = 50 + 45 + 40.50 + … = 50(1 + .9 + .9^2 + .9^3 + …) = 50[1/(1 - .9)] = 50[1/.1] = 50[10] = 500 This means when your grandmother sent the 50 buck to you the Wayne economy grew by $500. This is awesome. The 50 buck was multiplied into $500. When cities help finance a stadium they make a similar argument. Their initial expenditure means many rounds of additional spending can occur.

  6. The multiplier The initial 50 buck from your grandmother is like the city putting up money for a stadium (they actually sell bonds, but pump the money into the system for construction). After this direct injection of money there are indirect or secondary expenditures. At the secondary stage I indicated that there will be some consumption and some saving. I mentioned 90% of new income will be spent and 10% will be saved. The marginal propensity to consume is the additional consumption from the additional income and the marginal propensity to save is the additional saving from the additional income. So MPC = change in C / change in income = .9 here, and MPS = change in S / change in income = .1 here and MPC + MPS =1

  7. The multiplier Before I had So the new spending adds up to = 50 + 45 + 40.50 + … = 50(1 + .9 + .9^2 + .9^3 + …) = 50[1/(1 - .9)] = 50[1/.1] = 50[10] = 500 The multiplier can be seen as 1 divided by the MPS. The 10 here is “the multiplier.” It is the amount by which the original 50 buck is multiplied to get the final impact on income. The multiplier can also be seen as 1 divided by the quantity (1 minus the MPC). If the MPC = .9 we see the multiplier is 10. If the MPC is .67 the multiplier is…………………………………?

  8. The multiplier – overstated? In the context of a local economy the multiplier as stated so far is probably overstated. In other words, in our simple example of 50 buck from your grandmother the Wayne economy will not grow by $500. Reasons for this: 1) Leakages – some people who earn off the direct spending may take their income to another community to spend (like Norfolk, here), 2) In the larger context of the team impact on economy athletes have higher tax brackets and thus MPC is lower, 3) With shorter working life, athletes also tend to have higher MPS than would normally occur, 4) Wealthy folks, with sustenance needs easily met, tend to have higher MPS.

  9. Overstated multiplier In the national economy we have the multiplier as 1/(1 – MPC). Noll and Zimbalist (two who have done a lot of work in econ of sports) say for a local economy the multiplier is 1/(1 – {MPC times f}), Where f is a local adjust factor. Noll and Zimbalist argue the because of leakages and other arguments on the previous slide that for local situations MPC is .67 and f = .5, so the multiplier is 1/( 1 – {.67(.5)}) = 1/(1 - .335) = 1.5, which is far less than our 10 from the simple story.

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