Like many local businesses LePA Skincare encourages you to ‘go local’ (buy from local businesses instead of national chains). But why???
The Multiplier Effect
If you’ve ever taken an economics class then you may remember the name John Maynard Keynes. One of his contributions to modern economics was the theory of the multiplier effect. He showed us how spending $$ reverberates through the economy. If you spend $100 at a grocery store, for example, the store may keep $20 and use $80 to pay for wages, goods, services, etc… The recipients of the $80 may keep $16 and spend $64 on their cost of wages, goods, services, etc… This process repeats itself over and over again across every single spending transaction in an economy. This multiplier effect was actually formalized into the mathematical equation, (x) 1/(1-MPC). The MPC (Marginal Propensity to Consume) here is 0.8; since the store spent 80% of their income. So the total effect of your $100 spent at the grocery store was ($100) x 1/(1 – 0.08) = $500! So what does this mean to our local economy??
Local vs. Chain
Since we now understand the how the multiplier effect works we can begin to explore where that $$ goes. Back to our example from above – the grocery store uses part of the $$ to pay for wages, goods, services, etc… Most local grocery stores will hire locals, buy locally grown produce and goods, and contract local service providers (accountants, marketing, etc…). A chain grocery store, however, may have standing vendor contracts with national providers, corporate accounting departments, and the like. When combined with the multiplier effect this results in lots of $$ either staying in or being exported out of the local economy.
This concept was formally documented in a report published by the Civic Economics group here in Austin. They found that $100 spent at Borders Bookstore (national chain) had a $13 local economic impact whereas $100 spent at BookPeople or Waterloo (local merchants) had a $45 local economic impact. More importantly they found that Borders Bookstore had an annual local impact of $800,000 (national chain) whereas BookPeople and Waterloo (local merchants) had annual local impacts of $2,800,000 and $4,100,000, respectively.
If you believe any of this then it’s easy to understand why ‘going local’ can keep the Austin community strong and prosperous. So the next time you have a chance, why not go to your local hardware store instead of the big box retailer? Why not grab lunch from a local burger joint instead of that drive-through chain?
If you’re interested in learning more about the multiplier effect and how it creates value for the local economy, the Sonoma County Go Local organization has a really great article and presentation that explains the concept in detail. You can find out more about local businesses here in Austin by visiting the GoLocalAustin website, the AIBA (Austin Independent Business Alliance) website, or the Independent We Stand website.
- Buying Local: How It Boosts the Economy by Judith Schwartz, TIME Magazine (2009)
- Consumers Buy Into ‘Buy Local’ by Kimberly Weisul, Businessweek (2010)
- The Andersonville Study of Retail Economics, Civic Economics (2004)
- Economic Impact Analysis: A Case Study, Local Merchants vs. Chain Retailers, Civic Economics (2002)