Economic Base Theory: Using Multipliers to Predict Regional Economic Impacts (VIDEO)

In this video, Adrienne Johnson, research director at Memphis’s Economic Growth Engine, continues her instruction on economic base theory’s  two-sector, demand-focused model of regional economic activity. Before you view this lecture, you should have a basic understanding of the following:

• How the model defines a regional economy, focusing on two different types of industries: basic (exporting) and non-basic (local).
• How economic analysts typically apply the model–through intuitive use of judgment or by using calculations derived from location quotient (LQ) metrics.
• Advantages and disadvantages of both analytical approaches.

Now, we examine multipliers. A multiplier is a ratio of total economic activity to basic economic activity. When analysts use economic base theory to model an economy, they apply multipliers as a tool for calculating a particular basic industry’s likely impact on the regional economy.

Multipliers measure the growth of an individual basic industry in relation to the growth of the entire economy. Multipliers, which may be calculated manually or purchased from a third-party vendor, are used to predict total economic impacts from events happening in the region. For example, multipliers may be applied to predict impacts such as:

• The jobs and tax revenue generation resulting from new or expanding businesses development.
• Negative economic impacts stemming from business closings or downsizings.

Key takeaway: If a region can increase the level of basic employment, it can increase total employment by that amount times the multiplier.

In the next module, you will have an opportunity to practice using multipliers to predict economic impacts of a few basic industries in a region.