Multipliers

If there is an increase in final demand for a particular product, we can assume that there will be an increase in the output of that product, as producers react to meet the increased demand; this is the direct effect. As these producers increase their output, there will also be an increase in demand on their suppliers and so on down the supply chain; this is the indirect effect. As a result of the direct and indirect effects the level of household income throughout the economy will increase as a result of increased employment. A proportion of this increased income will be re-spent on final goods and services: this is the induced effect. The ability to quantify these multiplier effects is important as it allows economic impact analyses to be carried out on the Scottish economy.

Type I and Type II multipliers are presented in the downloads section of this website. In summary, Type I multipliers sum together direct and indirect effects while Type II multipliers also include induced effects.

Definitions of Multipliers and Effects:

Output Multipliers

The output multiplier for an industry is expressed as the ratio of direct and indirect (and induced if Type II multipliers are used) output changes to the direct output change due to a unit increase in final demand. So that multiplying a change in final demand (direct impact) for an individual industry's output by that industry's Type I output multiplier will generate an estimate of direct + indirect impacts upon output throughout the Scottish economy.

Employment Multipliers

The employment multiplier is the ratio of direct plus indirect (plus induced if Type II multipliers are used) employment changes to the direct employment change.

Employment Effects

Employment effects show the direct plus indirect (plus induced if Type II multipliers are used) employment change to the direct output change due to a unit increase in final demand.

Income Multipliers

These measure the change in income (compensation of employees) which occurs throughout the economy as a result of a change in final demand. They show the ratio of direct plus indirect (plus induced if Type II multipliers are used) income changes to the direct income change.

Income Effects

These show the direct plus indirect (plus induced if Type II multipliers are used) income change to the direct output change due to a unit increase in final demand.

GVA Multipliers

The GVA multiplier is expressed as the ratio of the direct and indirect (and induced if Type II multipliers are used) GVA changes to the direct GVA change, due to a unit increase in final demand. In other words, if you have the change in GVA for the industry the GVA multiplier can be used to calculate the change in GVA for the economy as a whole.

GVA Effects

The GVA effect is expressed as the direct and indirect (and induced if Type II multipliers are used) GVA changes to the direct output change, due to a unit increase in final demand. In other words, if you have the change in output (or turnover) for the industry the GVA effect can be used to calculate the change in GVA for the economy as a whole.

Example 1 - Use of employment multipliers: the effect of a company opening or closing

Multipliers can be used to look at the impact of a specific event on the Scottish economy - for example a company opening or closing. To illustrate this, a hypothetical opening of a company in the "Computing Services" industry, employing 100 people on a full-time basis is considered.

In assessing the impact of this new company we estimate:

  • effects on suppliers of the company
  • effects on the economy due to an increase in the spending of the new employees

This is achieved by employing the appropriate multipliers for the type of industry concerned. For the illustrative example, the multipliers used will be for the "107 - Computing services" Input-Output group.

Effects on Suppliers (Indirect Employment Effect)

Multiplying the direct increase in jobs by the "Computing services" Type I employment multiplier gives: 100 x 1.34 = 134 direct and indirect new full-time equivalent jobs. Subtracting the initial direct job increase gives the additional indirect increase in jobs throughout the Scottish economy as 34 (full-time equivalent).

Effect of increased Household Expenditure (Induced Employment Effect)

In addition to the effect of increased employment, we would expect to see an increase in household expenditure among the people who have gained employment through both the direct and indirect employment effects. This is the induced effect and is estimated using the Type II multipliers.

Multiplying the direct increase in jobs by the "Computing services" Type II employment multiplier gives: 100 x 1.64 = 164 direct, indirect and induced jobs. As we have already calculated a direct and indirect increase in employment of 134 ( FTE), we estimate that 30 further jobs will be created as a result of this induced demand.

Example 2 - Estimating the effects of a change in final demand

The above example used an estimate of jobs created directly in one industry to estimate the numbers of jobs created indirectly and through induced demand throughout the economy. However, the direct impacts upon an industry are often presented in monetary terms i.e. increased exports or a change in Government spending. The following example uses the hypothetical scenario of an additional £5 million of exports to the Rest of the World by the "Man. of Other Inorganic Basic Chemicals" industry.

The effect on output (using Output Multipliers)

The direct impact upon "37 - Man. of Other Inorganic Basic Chemicals" will be a requirement to increase its total output by £5 million to meet this additional final demand. To estimate the indirect effect on this industry's suppliers, we multiply the direct impact (£5m) by the Type I output multiplier for this industry ( 1.55) giving a total of direct plus indirect impacts of £7.75 million. Similarly to the example above, we would expect the direct and indirect increases in output to lead to increased employment in the affected industries and subsequently to an increase in household consumption. Multiplying the direct impact (£5m) by the Type II output multiplier ( 1.68) gives £8.41 million of increased output (direct, indirect and induced effects).

The effect on employment (using Employment Effects)

The direct change in output can be also be used to estimate the effect upon employment in Scotland . Multiplying the direct output change by the Type I employment effect for this industry gives an estimate of the direct + indirect employment changes resulting from this additional output. £5m x 6.15= Approximately 31 full-time equivalent jobs created directly and indirectly throughout the Scottish economy. The direct, indirect and induced employment change can be estimated using the Type II employment effects.

The effect on income (using Income Effects)

If employment were to rise, we would expect to see an associated rise in household income as these new posts are filled. The income effects estimate the effect of the direct change in output upon household income in Scotland. Multiplying the direct output change by the Type I income effect for this industry gives an estimate of the direct + indirect income changes resulting from this additional output: £5m x 0.23 = £1.15m of additional household income created directly and indirectly. The direct, indirect and induced income change can be estimated using the Type II employment effects.

Page updated: Tuesday, May 10, 2011