Understanding Your Community's Economy

People often mention the possibility of manufacturing a product using local agricultural commodities or manufacturing hi-tech products. But the possibilities are only partial answers and simplistic solutions to complex problems.

Static Model

From this image we can learn the following:

A. Money flows into the barrel in two ways:

1. When a product is sold to an outside customer (exported), a local firm earns new dollars.
2. When dollars are brought in from outside sources by the city and county governments and by community citizens, then new dollars flow into the barrel. These are captured dollars. These unearned dollars can come from social security and other retirement payments, interest and dividend receipts from outside investments, investments by outsiders, and grants from higher governmental agencies.

1. Local firms buy their goods from outside sources.
2. Local households go out of town to buy goods and services.
3. Local employees pay taxes and social security to higher governmental units.
4. Community citizens, local firms, and local government invest and spend local resources on ventures that don't pay off.
5. Community citizens invest their dollars in outside ventures instead of local business opportunities.

Many types of economic activity can be part of the economic base that earns these export dollars. The types of industries most often considered are agricultural production, mining, forestry, fishing, manufacturing, tourism, and government. However, a firm in any industry can become an exporter.

When a motel serves the traveling public, that motel earns outside dollars. If a newspaper sells printing services to an out-of-town customer, it also earns outside dollars. It is important to look at the potential export markets of all local firms.

Other ideas suggested by this rain barrel model focus on plugging leaks. One way to plug leaks is to provide locally those goods or services currently being purchased outside the area. This may be a product bought by a local firm to use its production process or purchased by many local households to consume. This idea is import substitution.

Another way to plug leaks is to encourage people to invest their savings locally. This keeps the money circulating in the economy and adds to the productive capacity of the local economy.

Finally, if we put the inefficiently utilized local resource to work more productively, this plugs a leak. For example, Main Street buildings that are empty or partially unused can be put back into service by private retail businesses. Another example would be to use an empty building as a senior citizen center or as a recreation and exercise center.

From this model we learn that new dollars must be earned or captured from outside sources. We also learn that if we can plug the leaks going to outside businesses and if we can avoid the inefficient uses of local resources, the rain barrel may be able to fill faster than it empties.

In summary, it is important to realize that it is impossible to seal a community's economic boundaries completely. However, it is possible to slow the rate in which dollars leave the local economy.

Economic strategies -- buy locally and import substitution -- represent ways of stemming the flow of dollars out of a community's economy.

Here are other ways to bring in outside dollars:

Dynamic Model

One can compare the speed of the motor with the speed of the local economy. When all firms, households, governmental units, and other producing entities are working at full capacity, the level of prosperity is high. When the productive forces slow down, the level of prosperity drops.

Most people are familiar with measures of this dynamic model. One is the turnover of the dollar as it passes from one firm to another and from a firm to local households. Another related concept is the multiplier that can be expressed as an income multiplier, an employment multiplier, or an output multiplier.

In Figure 1, a new dollar enters the local economy and turns over five times. Each time it turns over, some of that dollar leaks out. The leakage is dependent on the proportion of all local household budgets spent or invested outside the community, as well as the portion of income taxed away by state and Federal governments.

Also, the leakage and the resulting income multiplier are dependent upon the portion of a dollar earned by exporting firms. The portion becomes income to local households. This will depend on the profitability of local firms as well as their purchasing patterns. Do they buy labor locally or do they hire people who commute into town to work? Do they buy their supplies locally or do they import them?

Local households receive income as a result of this multiplier effect. We call this making new income. Another way to look at this is through the following formula:

Where:
IM = Income multiplier
PCL = The proportion of all household budgets spent locally. This ranges from .40 to .95
PSY = The proportion of a new dollar that becomes income to local households. This ranges from .25 to .60

For example, when the proportion spent locally by households (PCL) is 80 percent or .80 and when the proportion of an earned dollar that becomes income to local households (PSY) is 50 percent or .50, then the income multiplier can be calculated as:

In summary, when we put the static rain barrel model into motion by adding in the local businesses, local governments, school, etc., we add the dynamic element to the model. These decision-making units combine local resources (such as land and buildings) with non local resources (borrowed money or new inventions) to make products and services sold at home and away. The results of the community's dynamic element is the creation of new income within the community to support local households, i.e., making it.

The key points are: (a) How efficient and competitive are these units of production? (b) Where do they buy their resources used to make goods and services? and (c) How much money leaks out of the community from household budgets?

Income Multiplier in the Dynamic Model

1. A new $1.00 of income earned
2. $ .60 leakage
   $ .40 respent locally
3. $ .24 leakage
   $ .16 respent locally
4. $ .10 leakage
   $ .06 respent locally
5. $ .03 respent locally
   $ .03 leakage
6. $ .01 respent locally
   $ .02 leakage

More Concepts

Local firms respond to external and internal market demand changes. An ability to respond to market demand depends on the availability of resources such as investment capital, skilled workers, and the know-how to produce at a competitive cost.

These constraints can be overcome by discovering new local resources, bringing in new outside resources, or creating new ways to combine resources. New ways to combine resources are created when new inventions are developed, new innovations adopted, and new institutions formed.

Finally, those who combine the resources and manage and/or own the firms that make local products must be put into this model of community economic development. Gross community output is diminished if these producers are receiving outdated or incorrect information and if they are not able to keep up with change because they lack education and training. This can result in local firms' losing their share of the market to competing firms in other communities.

In conclusion, there is no simple recipe for economic prosperity. However, some helpful concepts identify important variables that need to be considered by community leaders. Three of the most usable concepts follow:

These three avenues of economic development can be pursued using these five strategies:

1. Retaining and expanding existing firms.
2. Improving local linkages between local buyer and sellers.
3. Creating new businesses.
4. Capturing outside dollars.
5. Bringing in outside firms.

The second strategy is a "making it" strategy. The idea is to increase the flow of dollars between local buyers and sellers.

The third strategy can be either an "earning it" strategy or a "making it" strategy. If the new firm wants to sell to outside markets, then the strategy is an "earning it" one. If the new firm wants to sell to local customers, then the strategy is a "making it" one.

The fourth strategy is obvious; it's a "capturing it" strategy.

The fifth strategy is usually an "earning it" strategy. Often, outside companies enticed to open a branch in the community will be oriented to markets that are beyond the local community.

For more information on how community development can be stimulated, contact your county Extension office.

• Strategies For Economic Development, Schmidt, Joe F., and Albert E. Myles, Publication 1645, Cooperative Extension Service, Mississippi State University, November 1988.
• Setting Community Economic Goals, Schmidt, Joe F., and Albert E. Myles, Publication 1644, Cooperative Extension Service, Mississippi State University November 1988.

Mississippi State University does not discriminate on the basis of race, color, religion, national origin, sex, age, disability, or veteran status.

Publication 1646
Extension Service of Mississippi State University, cooperating with U.S. Department of Agriculture. Published in furtherance of Acts of Congress, May 8 and June 30, 1914. Ronald A. Brown, Director