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Multiplier Analysis
Kul EWK 3.1
2008/2009
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OVERVIEW The heart of Economic base theory is the proportion that
the economic growth of region ultimately depends onoutside demand for its products
In term of economic base theory there are basic and nonbasic sector
If demand for export o the region increases, the basicsector expand, and generates an expansion in thesupporting activity of the non basic sector
Total Employment=Basic employment+Non BasicEmployment
Total Income=Basic Income+Non Basic Income
The ratio between basic sector and non basic sector iscalled the Base Ratio
The base ratio can be used to calculate base multipliervalue
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What are Multipliers? Coefficient which states multiply of direct effect and indirect
effect, goes from increasing of final sector on one unittoward total production of agregate sectors in certain area.
Multipliers measure total change throughout the economyfrom one unit change for a given sector.
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Three Types of Multipliersare calculated from Model
1. Employment
2. Income3. Output
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The Base Employent Multiplier Changes in total employment, for every one unit changes in basic
employment
Total Employment = Basic employment X Base Multiplier
Formula for estimating:Change in Total employment = Change in Basic employment X BaseMultiplier
Example:
if in particular region, for every worker in the basic sector there are two
worker in the non basic sector, the base ratio will be 1:2, and the basemultiplier will be 3:1
this means that when basic employment increases by one job, it multipliesto a total of three new jobs, including new jobs in both basic and non basic
sectors.
ymentBasicEmplo
ymentTotalEmplolierBaseMultip
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A change in total income for every one unit changes of income in basicsector
Total Income = Basic Income X Base Multiplier
Formula for estimating:
Change in Total Income = Change in Basic Income X Base Multiplier
eBasicIncom
eTotalIncomlierBaseMultip
The Base Income Multiplier
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Regional Income Determination
urcesNonBasicSoIncomeFromoportionOflierBaseMultip
Pr1
1
Regional income is determined by the portions of the four types ofspending:Consumption spending, Investment spending,Government spending, and Exports
In term of economic base theory, it is determined by earning beinggenerated in the basic sector and multiplied through purchases inthe non basic sector
The multiplier reflects the proportion of income that is spent in theregions non basic sector times the proportion of spending in thenon basic sector that in turn generates income in the region
comeNonbasicIneTotalIncometotalIncom
lierBaseMultip
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Since total income results from nonbasic sector spending times the fraction of thatspending that generates regional income, and since non basic sector spending is
itself a proportion of tota regional income, the multiplier formula could be:Regional Base Multiplier=1
1-(Proportion of income spent in the regional nonbasic sector X Proportion that generates regional income)
Changes in total regional income=
(Changes in income regions basic sector X Regional base multiplayer)
Example:
Suppose research Based on sample surveys indicatesd that of each $1.00 of GrossRegional Income, only $0.60 was spent on purchases in the region nonbasic sector,and suppose it was also found that every $1.00 spent in the non basic sector, only $0.50 became regional income, while remaining $0.50 paid for goods imported for salein the origin
1
RBM=
1-(0.6)(0.5)
= 1.43
Values in spending on regional export, investment,
or govt activities can be estimated, hypothesized
and multiplied by RBM, yielding the change in total
regional income
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NOTE
Value of variables which are rationed must be in the same measurement. the prices must on the same year/time
Be cautious in using employment data, because among employments havedifferent weighed values.
so, employment data are often used if they are collected by the direct survey.
The multiplier base value calculated is based on ratio of employment in curentcondition, it maybe will be different from the future condition.
so it is suggested to use value of average change per year, between totalemployment and change in basic employment
The multiplier base value calculated is based on ratio of employment in curentcondition, it maybe will be different from the future condition.
It has the time lag problem, because the base multiplier doesnt workinstantaneusly.
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Advantages in term of planning Can be higly utilitarian tool for exploring, evaluating, and making
rough estimates of trends in employment, revenue, income,population, housing needs, community service needs, and otheraspects of regional complex that are important to analysts anddevelopment planners.
Might be assesing ways the multiplier could be increased by actionsthat reduce different types of leakeges, and for indicative purposescomparing the consequences of these different actions, givencurrent levels of basic spending.
Breaking Jokes 1
http://localhost/var/www/apps/conversion/tmp/scratch_4/DEMI%20CINTAKU%20PADAMU.ppthttp://localhost/var/www/apps/conversion/tmp/scratch_4/DEMI%20CINTAKU%20PADAMU.ppt -
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The Analysis of the impacts of change on host of
economy, through an assesment of the variouslinkages between firms and factor inputs
Keynessian Multiplier Analysis
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Y
EAD2
E2 = Y2YE1 = Y1
D
AD1
The change in
income Yassociated
with any
change inaggregate
demand ADcan be
described asY=k(AD),where kis
multiplier
The multiplier is given by the value of the horizontal shift from Y1 to Y2,
divided by the vertical shift fromAD1 toAD2
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Approaches to Regional Multiplier Analysis(Mc. Cann)
Economic Base Models
Keynessian Regional Income Multiplier Input-Output Analysis
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Keynessian Regional Multiplier
Similar in nature to the economic base multiplier
Assuming that marginal and average input costs remain
constantAssuming that there are no capassity constraints within
the economy
The principe:Multiplication between a change in any ofthe individual component of agregate demand and the
individual change by the value of multiplier will provide theoverall income change, after all the successive round ofexpenditure have taken place
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The Standard Keynessian Income
Agregate Demand Expession
rtrrrr r MXGICY
Yr= Regional Income
Cr= Regional Consumptions
Ir= Regional InvestmentsGr= Regional Government Expenditure
Xr= Regional Exports
Mrt = Regional Imports
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Modification:
= Exogenous Consumptions
= Exogenous Regional Imports
t = The Average Regional Tax Ratethat disposable income after tax is: Yr(1-t)
rr mYMM
C
M
rtrcYCC
rtr tYT
rtr cYT
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tmc
MXGICY
rrr
r
11
The regional income Yr, is thus given as the sumof the exogenous components of aggregatedemand, multiplied by a regional multiplier k, thus
(c-m): the marginal prospensity to
consume locally produced goods
If the value of (c-m)increases, the value ofregional multiplier increases
tmckr
11
1
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If we consider the effect of an increase in any one
of the components of aggregate demand withinthe multiplier framework:
The Greater is the regional value of MarginalProspensity to consume locally produced goods,the greater the value of the regional multiplier, andthe greater is the increase in regional income.
tmc
MXGICY
rrr
r
11
)(
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The differences between national and
regional multiplier model
In term of Investment:
In standard national model, investment dependson issues such as inflation, interest rates, and
expectations.In regional framework, the marginal prospensity toinvest in the local economy may be the function oflocal regional income.
the marginal prospensity for governmentinvestment is a positive function of regionalincome
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In term of expenditure
In National Income-expenditure model
government expenditure (G) is assume to beexogenous income, depending primarily onpolitical issues
Government expenditure in regions is depend on
the level of regional income (tend to be inverselyrelated to the level of regional income)
the absolute level of government expenditure in aregion, tend to increase as greater levels ofinvestment are reqired to provide and maintainlocal public infrastructure such as road, school,hospital, etc.
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References
Bendavid-Val, A., Regional and Local Economic Analysisfor Practitioners 4th edition, Praeger Publishers, One
Madison Avenue, New York, 1991 Mc. Cann, P., Urban and Regional Economics, Oxford
University Press, Great Clarendon Street, Oxford, 2001
Stimson, R.J., et al, Regional Economic Development
Analysis and Planning Strategy, Springer-Verlag BerlinHeidelberg, 2002
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THANK YOU
Lets go to the next.....Breaking Jokes2
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