Multiplier in Action – The Circular Flow

As principles students learn early on, the economy is made of a circular flow of goods, services, and labor. Total spending becomes the $ firms can use to pay workers, which becomes income for those households, which in turn becomes more spending that supports more jobs.  The economy grows (and employment grows) when something injects an increase somewhere in the circular flow.  Then as the money flows around, it has  a multiplier effect.

Locally, if we focus on the mid-Michigan area, we can see that effect. Since GM added another shift some weeks ago to it’s Lansing Delta Township plant, it moved 400-500 jobs to Michigan from Tennessee (where is closed a different plant).  For Michigan, this is good news.  It’s not only more jobs here, but the people employed spend their income creating jobs for even more locals in stores, suppliers, restaurants, etc.  Most estimates put this multiplier effect from manufacturing jobs at around 1.5-2.0.  So, for every 10 new jobs in manufacturing the local economy will actually grow by 15-20 new jobs.