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The Importance of Ripple Effects

September 14, 2009 by Emsi Burning Glass

Here is an article by Time Magazine that does a great job illustrating the “ripple effect” concept. The article points out how even one job loss in a well-established industry such as manufacturing can quickly lead to additional losses in local purchases (restaurants), tax revenue (government), and savings.

“In an unhealthy economy, a single lost job becomes infectious, combining with others and spreading through family, neighborhood and community. Widespread cutbacks in spending by families mean lower demand for businesses and lower tax revenues for the government. This belt-tightening means fewer car sales and thus fewer jobs for car-part makers. It means less government spending on infrastructure and other public services, including economic development. The sum effect is less available work for job seekers — a perfect vicious circle.”

This is the case because well-established industries such as manufacturing produce goods that are exported out of the region. This means that virtually all the revenue generated by that industry is coming into the region from the outside. When these “region-building” industries are lost and with them the infusion of outside moneys, all the resident-serving or “region-filling” industries (grocers, restaurants, doctors, and even local government) see less money.

So from a regional development perspective it is important to be familiar with those industries that have significant regional multipliers, which are the result of bringing outside moneys into the local economy. Furthermore, if these “exporting” industries are lost there will necessarily be reduced circulation of funds among the economy’s other industries. Regions grow and flourish when they have a healthy mix of industries that (1) bring moneys into the region and (2) internally circulate these moneys for as long as possible.

If you are wondering which industries pull money into your economy and which industries keep that money circulating, please contact us — we would be happy to help.

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