Multiplier Effect

Tonight, we had another great econ class. Of course, there is quite a bit to talk about right now with the bank failures, foreclosures, and credit crunch. Actually, I'm listening to CNN right now and they call it the "economic crisis." We also talked about GM and Ford and the perils that they are facing. So this is all kind of bleak stuff, but it is pretty interesting to discuss. I really like econ. It makes a lot of sense to me and it seems very relevant.

Tonight, we talked about the multiplier effect. The multiplier effect is this phenomenon that happens when money is spent. Okay, yesterday, I purchased bananas and apples at the grocery store. Usually, I just think about giving the cashier the money and then taking my apples and bananas. However, what happens to that money after it leaves the cash register? Well, some of it goes to cover the cost of the apples and bananas. Some of it goes to pay utilities for the grocery store. Some of it goes to pay property taxes of the establishment. Then there is some that goes to the employees. Guess what these employees do. They go buy more apples and bananas (or maybe they go down to Subway and get a sandwich). Down at the Subway, a certain amount of the money used to purchase the sandwich goes to the employees at Subway. One of the Subway employees heads up to Meijer (after getting gas and coffee at the BP) to buy a pair jeans... My $4.05 just carried out into a portion of many future transactions and maybe ended up having an overall economic impact of $6.48. So move the decimal points a few places and change purchases and $4,050,000 has an impact of $6,480,000.

As I was driving home tonight, I started wondering about the multiplier effect. What if we changed the unit from dollars to... smiles, hugs, charitable contributions, love, praise, encouragement? What if someone smiled 405 times and the total impact of second, third, and fourth rounds of smiles ended up being 648? That's a pretty good return on investment - especially when a lot of investments are losing ground right now.