Tag Archives: Multiplier

Football stadiums and economics

With the start of the EPL this weekend I thought it appropriate to look at something related to football. Teams in the EPL and other domestic leagues often look for funding from the government to build stadiums with the rationale that the investment will attract consumers and businesses to the local area. This suggests that a multiplier effect would be at work and the benefits to the area go beyond that of the football field.

The size of the multiplier is influenced by how much of extra income is spent on domestically produced products. The more that is passed on in the circular flow, the larger will be the multiplier. This means that the size of the multiplier varies inversely with the tendency for extra income to be withdrawn from the circular flow – the marginal propensity to withdraw. It is calculated by 1/marginal propensity to withdraw. In the case of a two sector economy, this is I divided by the marginal propensity to save (mps). For example, if people save $20 out of an increase in income of $100, the mps will be 0.2 and the multiplier will be 1/0.2 = 5.

Cities with new stadiums initially create jobs and growth but in the long-term there is little economic benefit. Why?

  1. For all their cultural significance, sports tams are not very big businesses and so their overall impact is small in most cities of any size.
  2. If local residents spend more at the stadium they are likely to reduce spending elsewhere which will impact on local businesses.
  3. A stadium may attract more visitors from outside the area who inject money into the local economy, but the multiplier effect is likely to be small because many of the services they consume will actually come from outside the area – e.g. food and beverages may be shipped in from elsewhere.

If you look at previous World Cups or European Championships there tends to be the same issues as mentioned above

The 2010 World Cup in South Africa saw Soccer City, the largest sports venue in Africa, undergo a £300 million renovation which costs £250,000 a month to maintain. It is the stadium for the Kaizer Chiefs and Orlando Pirates but is rarely full and has struggles to make revenue from other sources. See below:

Brazil spent about $3 billion building 12 new or heavily refurbished stadiums for the 2014 World Cup. Officials justified the expense by saying that the stadiums would generate revenue for years to come with Brazilian football premier league games and rock concerts but most stadiums are failing to generate any revenue. The most expensive stadium in Brasilia – 72,000 seater and a $900 million venue – is used a bus parking lot. A big issue here was that there was no major professional football team in the city so therefore limited crowds would be present. Although the organisers rationale was to improve facilities around the country there are white elephants evident – in some locations teams cannot afford the rental so will play at much smaller venues. A $600m stadium in Manaus was used for 4 World Cup games but is now empty which is not surprising as the city itself has a lower division football team who don’t have the finances. What people forget is that, although the stadiums might look good and are used to host the biggest sporting event in the world, a large number of people are displaced and neighbourhoods disestablished. But organisers say that it will add to the well-being of the population especially if the host side wins – however this has not been the case for Brazil – in fact as we know it turned out to be a bit of a trashing in the semi-final against Germany. It will be interesting to see the use of stadiums in Russia after the World Cup just gone but one cannot doubt that the morale of the Russian people was significantly boosted by their teams performance.

Volvo Ocean Race and the Multiplier Effect.

I am quite an avid watcher of the Volvo Ocean Race with the daily race updates and the excellent graphics on their website – currently they are in Auckland before setting sail for Itajaí in Brazil. Most days they have news on the current positions of the yachts and who has made gains and losses in the last 24 hours. A recent race update dealt with the economic impact that the race has had on the Spanish economy and it just happens that I am covering the multiplier with my A2 Economics class.

The Multiplier Explained

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
1 ÷ MPS+MRT+MPM

Source: CIE Revision Guide by Susan Grant

Impact of Volvo Ocean Race on Spanish Economy

PriceWaterhouseCoopers (PwC) conducted a study measuring the impact of the Volvo Ocean Race on the Region of Valencia and Spain. Some their findings are:

  • The impact in the Region of Valencia has grown to 68.6 million euros in GDP and 1,270 full-time equivalent jobs.
  • Hotels, restaurants and local business were the sectors to benefit the most.
  • Alicante received 345,602 visitors from October 11 to 22, 2017, (10.3% more than in 2014-15 and 17.6% more than in 2011-12).
  • The Volvo Ocean Race had a significant positive effect on national tax revenue, adding more than 41 million euros.
  • The media value directly linked to coverage mentioning the Alicante brand over the period of the race start exceeds 36 million euros.

The Volvo Ocean Race 2017-18 has added 96.2 million euros to the Spanish Gross Domestic Product (GDP), an increase of 7.6% over the 2014-15 edition. The race also generated the equivalent of 1,700 full time jobs in Spain, according to an economic impact study delivered by PriceWaterhouseCoopers (PwC) measuring the impact of the Volvo Ocean Race on the Region of Valencia and Spain.

The impact in the Region of Valencia grew to 68.6 million euros of GDP, a 3.3% increase on the 2014-15 edition. The sectors of activity that benefited the most were local businesses and restaurants, each by more than 10 million euros. In terms of employment, the equivalent of 1,270 full-time jobs were generated, a figure similar to the last edition.

The PwC study estimates a positive effect on tax collection in Spain of more than 41 million euros as a result of an increase in economic activity and employment generated by the Volvo Ocean Race 2017-18.

The actual value of the multiplier is not mentioned in the report but from all accounts the Volvo Ocean Race has had a very positive impact on Valencia.

The Multiplier explained

An initial change in AE can have a greater final impact on equilibrium national income. This is known as the multiplier effect and it comes about because injections of demand into the circular flow of income stimulate further rounds of spending.

Multiplier Process

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 realize 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

1 ÷ MPS+MRT+MPM

MPS = Marginal propensity to save

MRT = Marginal rate of tax

MPM = Marginal propensity to import

MPC = Marginal Propensity to Consume (of additional income how much of it spent)

e.g. $1m initial spending; MPC=.8

=> income generated = 1/(1-.8) = 1/.2 = 5

=   $5m

=> $4m extra spending ($1m initial, $4m extra spending, $5m total)

Use different equations depending on the information given.

e.g.: a) if the MPC is 0.5 – 50% of the income will be spent, 50% will be saved.

then MPS is 0.5 then the multiplier is 2 = 1/0.5 = 2

b) if the MPC is 0.8 – 80% of the income will be spent then MPS is 0.2 then the multiplier is 1/0.2 = 5

c) if the MPC is 0.9 – 90% of the income will be spent then MPS is 0.1 then the multiplier is 1/0.1 = 10

What is the effect of MPT – the marginal propensity to tax or t.

  • greater MPT would lead to less income being spent in the economy

Below is a very informative mind map that I copied from an old textbook.

Multiplier.png

US infrastructure could create those jobs

US InfrastructureSome alarming figures have been banded about with regard to America’s infrastructure. It is estimated that over 700,000 bridges are rated as structurally deficient. In 2009 Americans lost approximately $78 billion to traffic delays – inefficient use of time and petrol costs. Also crashes which to a large extent have been caused by road conditions, cost a further $230 billion.

According to the American Society of Civil Engineers the US needs to spend $2.2 trillion bring their infrastructure up to standard. The Congressional Budget Office estimated in 2011 that for every dollar the federal government spent on infrastructure the multiplier effect was up to 2.5. Other indicators state that every $1 billion spent on infrastructure creates 18,000 jobs, almost 30% more than if the same amount were used to cut personal income taxes. – The Economist

Positive Externalities from infrastructure.

Investment in infrastructure has a lot of positive externalities – faster traveling time for consumers and companies, spending less time on maintenance. Research has shown that the completion of a road led to an increase in economic activity between 3 and 8 times bigger than it initial outlay with eight years after its completion. But what must be considered is that now is the best time to invest in infrastructure as it is very cheap – much cheaper than it will be when the economy is going through a boom period.