The Economics of Buying Locally

The reality of today’s economy is that cities derive most of their wealth from the export of goods and services elsewhere.  For the city of Vancouver, the main export is services (and, arguably, real estate speculation, but that’s another story…), which brings in a substantial amount of income to be spent locally.  This income gives us the means to maintain our standard of living, to grow businesses, to innovate, and to continually diversify the local economy.

However, a dollar earned from exports is actually worth more than a dollar to the local economy.  When economists speak of the local impact of additional investment dollars, or the local impact of additional exports, they often refer to a multiplier effect.  The multiplier effect refers to the extent that each additional dollar of earned income gets re-circulated between consumers and businesses in the local economy.  The multiplier effect is referred to often in the media in the context of large events or infrastructure projects (ie, the economic impact of the Olympics will be x, but when you take into account the multiplier effect it will be XXXX!).  As you may suspect, the multiplier effect is often greatly exaggerated, especially in the context of justification for big spending on large capital projects.

Which is not to say the concept should be ignored; it provides a framework to consider where a dollar earned from exports ends up, and just how far it goes.  There are a couple of different ways to calculate the multiplier effect, which I won’t outline in detail here.  The calculations begin by looking at a dollar someone earns, then considers how much of that dollar goes towards: 1) goods or services that the individual imports (or from someone else who’s imported them),  2) how much that person pays in taxes, 3) how much of that dollar the individual puts into their savings.  Whatever is left over, after subtracting these 3 expenditures, is said to circulate through the economy once more, and stimulate further economic activity (i.e., someone else in the local economy benefits from it).  These 3 things are ‘leakages’ from the standpoint of the economy; once a portion of that dollar is used for: 1) purchase of imports, 2) taxes, 3) savings, it has ‘leaked’ out of the economy.

The expenditure on imports is the most important for our discussion.  If you earn a dollar and then spend the entire dollar at an international coffee company (perhaps with an establishment on every street corner) the dollar is going towards goods that were imported from somewhere else.  The dollar ‘leaks’ out of the local economy in its entirety.  The multiplier effect would be very low, and would be limited to whatever portion of that dollar is going towards wages for local employees.  If, however, you could get your coffee from a local company, where the coffee vendor limited it’s imports and obtained most supplies from other local vendors, the dollar is re-circulated locally, thereby stimulating further investment, innovation, and activity.  Small communities, which depend on the import of a large quantity of goods, have very low multiplier effects.  Large communities, which have the capacity to produce more locally, have larger multiplier effects that stretch each earned dollar further.

At the end of the day, $1 of earned income can be worth $1.15 or $1.75 to the local economy, depending on how much it gets re-circulated.  So it’s not just about helping out your neighbour – by choosing to buy locally you are helping to make a dollar of earned income go further in the local economy!

Any negative consequences to spending locally?  If everyone buys locally, what happens to the markets for our exports?  Put your comments below!

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