Wondering whether your spending at the corner shop really matters? The local economy multiplier effect says it can: studies report that locally owned businesses recirculate more of each dollar nearby than chains do.
This guide sits within the wider topic of local businesses and community, so start there if you want the bigger picture.
| Item | Value |
|---|---|
| Average share of each purchase recirculated locally, local independent businesses | 52.9 percent |
| Average share of each purchase recirculated locally, chain stores | Less than 13.6 percent |
| Maine study: local spending per $100 spent (local independent vs big-box chain) | $45 vs $14 |
| Recirculation advantage of local over non-local companies, as AMIBA summarises it | 2-4 times more |
| Illustrative multiplier on $1,000 after six rounds (local vs nonlocal economy) | 1.43 vs 0.43 |
These figures come from AMIBA’s local multiplier page, which summarises studies by Civic Economics and the Institute for Local Self-Reliance. Figures can change as new studies appear, so check the source before you rely on them.
What the local economy multiplier effect actually means
Put simply, a dollar spent locally can be spent locally again. Wikipedia describes the local multiplier effect as the additional economic benefit an area gains from money being spent in its local economy.
Economist and author Michael Shuman offers a plain example on AMIBA’s page: a pharmacy’s employees go to the supermarket, which might buy from a local farmer. In his words, the more times and the faster a dollar passes between hands without leakage, the more income, wealth, and jobs in a community.
The New Economics Foundation uses a similar picture. On its Local Multiplier 3 page, it asks you to imagine the local economy as a bucket of water, where money spent outside the local area leaks out.
Researchers usually split the effect into three kinds of impact, according to AMIBA:
- Direct: spending by a business, such as inventory, utilities and wages.
- Indirect: how much money that first business spends at other area businesses.
- Induced: the spending of income by business owners, employees and other community members in their local economy.
How much more stays nearby? What the studies found
Civic Economics has run studies across North America comparing the local economic return of independents and chains. Averaged across them, 52.9 percent of each purchase at a local independent is recirculated locally, against less than 13.6 percent at chain stores, as AMIBA reports.
The Institute for Local Self-Reliance ran its own study in several small Maine communities. It found that $100 spent at local independents generated $45 of local spending, compared with $14 for a big-box chain, according to AMIBA’s summary.
That study counted local spending in four forms:
- Payroll.
- Goods and services bought from area businesses.
- Profits that owners spend locally.
- Donations to area charities.
The earliest Civic Economics study, for Austin, Texas, found that an independent bookseller and an independent music seller returned more than three times as much money to the local economy as a proposed Borders Books and Music outlet would. AMIBA adds that other studies mirrored the Austin result.
One caution on wording: the 52.9 percent figure is not money that “stays” put. It is the local spending generated after additional spending cycles in the local economy, AMIBA explains.
A worked example: $1,000 over six rounds
Shuman and Kate Poole built a simple model, quoted on AMIBA’s page. It assumes local businesses spend 60 percent of their receipts locally, while nonlocal businesses spend 30 percent locally.
In the local business economy, the numbers run like this:
- The first round of consumer spending leaves $600 in the economy.
- That is spent again on local businesses, leaving $360, so a total of $960 has been spent locally by the end of round two.
- By the end of round six, the first $1,000 has led to $1,430 being spent locally, a multiplier of 1.43.
In the nonlocal economy, the first round leaves $300 and the next leaves another $90. By round six the total is $428, a multiplier of 0.43, according to the same AMIBA page.
The gap comes from the share that leaves at each step. Each round, the local economy keeps twice as much as the nonlocal one, and the difference compounds as the money keeps moving.
How communities measure local money flows
The New Economics Foundation developed Local Multiplier 3 (LM3) as a simple and understandable way of measuring local economic impact, as NEF Consulting describes. The same page says there are five general stages in an LM3 analysis:
- Determine your “local” area.
- Identify your starting point, or income source.
- Break down how you spend that income within the local area.
- Survey the businesses and people you spend money on to find out how they spend their incomes.
- Collate the responses, do the maths and get your LM3 score.
LM3 measures how income entering the local economy circulates across three “rounds” of spending, per NEF Consulting. The same page says its introduction, The Money Trail, was published in 2002, and that the model was refined through work with all 26 local authorities in the North East of England, covering over £3 billion of annual spending with 140,000 suppliers.
If you are a community group, you may not need your own study. AMIBA notes that results across studies are relatively consistent, but that any study you rely on should explain its methodology clearly.
Where the numbers need care
The headline ratios are averages, not guarantees. AMIBA states that the exact amount recirculated varies by time, place, and industry, and that its figures average all the retail studies Civic Economics has conducted.
Also note who is speaking. The same page says the local multiplier helps Independent Business Alliances make a strong case for their work, so read it as an advocacy summary of the research rather than a neutral audit.
The phrase has a second, separate meaning in regional economics, where it describes the jobs spillover from a particular type of employment. Wikipedia reports Enrico Moretti found that each additional skilled job in tradable industries generated 2.5 jobs in local non-tradable services. It also notes that a reanalysis using a modified version of his method found only 1.02, so scholars still debate the size.
Putting it to use in your own spending
You do not need a spreadsheet to act on the idea. The mechanism described above points to a few simple habits:
- Choose locally owned independents when the price and quality are comparable, since owners spend more of their revenue locally.
- Think beyond households: AMIBA says local purchasing power includes local governments and other area institutions.
- Ask where a business buys its supplies, because more re-spending nearby means a higher multiplier.
For the everyday case for shopping close to home, see the benefits of shopping local. To look at one popular local spending channel in detail, read about how do farmers markets benefit communities in a separate guide.
Frequently asked questions
What is the local economy multiplier effect?
Show answer
It is the extra benefit a community gains when money is spent in the local economy and then re-spent there. Wikipedia describes it as the additional economic benefit accrued to an area from that local spending.
Does 52.9 percent mean that much of my money stays in town?
Show answer
Not exactly. AMIBA explains that the figure is the local spending generated after additional spending cycles, not money that sits still. It is also an average of Civic Economics retail studies, so any one town will differ.
Why is the nonlocal multiplier in the example below 1?
Show answer
In the model, nonlocal businesses spend only 30 percent of receipts locally, so each round leaves less in the area. By round six, $1,000 of spending has led to only $428 spent locally, a multiplier of 0.43, per AMIBA.
Is the jobs multiplier the same thing?
Show answer
No. In regional economic development, the term refers to the spillover effect a type of job has on other local activity, according to Wikipedia. The retail version compares where a purchase goes: a locally owned business or a chain.
