Keeping up with the Economy: Local Economic Multipliers

Keeping up with the Economy: Local Economic Multipliers

Approximately 30 states have adopted preferences for small or local businesses and 37 states also have “reciprocal laws” which add a percentage increase to out of state bidder’s proposal when compared to in-state bids. These local preferences can have a significant impact to a state’s economy. Purchasing in-state will not only increase a state’s revenue through sales and other taxes, but also have a broader impact on the local economy through the multiplier effect.

 width=What is the multiplier effect? This is an economic principle which states that every dollar you spend in an economy has a broader effect on the overall economic system. A more formal definition of the multiplier effect is that if there is a change in income or employment in a local economy which is caused by a new type of economic activity. Your procurement office can have a significant impact on the economy of a state!

The National Association of State Budget Officers (NASBO) estimates that government spending totaled 2.03 trillion dollars, and state spending is estimated to total 874.6 billion dollars in 2019. So, what would be the impact if every state bought local? Let’s look into this a little closer.

The size of the economic multiplier varies based on different factors. For example: the size of the locality and if the area is urbanized are two major factors. Some economic studies report various magnitudes of the multiplier. The commonly defined multiplier effect ranges between 1.20 to 1.50. If the multiplier is valued at 1.50 this means that for every additional dollar spent in the local economy, it has a $1.50 impact in the local economy. This effect occurs because spending money in the local economy can raise wages, create jobs, and increase consumer spending. This effect radiates out from the area the money was spent and effects broader regions as it dissipates throughout the geographical area.

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