The Leontief Inverse provides the central tool for multiplier analysis, which studies the effect of changes in final use on output and related aspects of the economy. These effects have three different economic drivers:
- Direct: This is the immediate effect caused directly by the change in final demand e.g. if there is an increase in final use for a particular product, we can assume that there will be an increase in the output of that product, as producers react to meet the increased demand;
- Indirect: This is the subsequent effect caused by the consequent changes in intermediate demand i.e. as producers increase their output, there will also be an increase in demand on their suppliers and so on down the supply chain;
- Induced: This is the effect attributable to the ensuing change in compensation of employees and other incomes, which may cause further spending and hence further changes in final demand e.g. as a result of the direct and indirect effects the level of household income throughout the economy will increase as a result of increased employment. A proportion of this increased income will be re-spent on final goods and services: this is the induced effect.
Two main types of multiplier effects.
Supplier linkage effects or Type I multipliers cover direct and indirect effects only. They estimate the impact on the supply chain resulting from a producer of a certain product increasing their output to meet additional demand. In order to meet the additional demand the producer must in turn increase the goods and/or services they purchase from their suppliers to produce the product in question. These suppliers in turn increase their demands for goods and services and so on down the supply chain. These Type 1 multipliers are also referred to as direct and indirect effects. GVA and Output multipliers are Type 1 multipliers. These multipliers underestimate the effect on the economy as they do not estimate induced effects.
Please note these published results are designated as “experimental” statistics to reflect their status as new official statistics undergoing evaluation. The statistics are published to encourage feedback from users and to build in quality at an early stage in line with the Code of Practice for Official Statistics.
Users should adopt a cautious approach to the use of the multipliers which are prototype in nature.
Different multipliers measure the effect on different policy targets:
Output multipliers measure the effect of one unit change in the final demand of a specific product. The output multiplier for a product is expressed as the ratio of direct and indirect output changes to the direct output change due to a unit increase in final demand. Multiplying a change in final demand (direct impact) for an individual product’s output by that product’s Type I output multiplier will generate an estimate of direct + indirect impacts upon output throughout the NI economy.
Output multipliers measure the effect on total GVA of one unit change in the GVA of a specific product. The GVA multiplier is expressed as the ratio of the direct and indirect GVA changes to the direct GVA change, due to a unit increase in final demand. In other words, if you have the change in GVA for the product the GVA multiplier can be used to calculate the change in GVA for the economy as a whole.
For Northern Ireland employment multipliers have not been produced due to the lack of the data for employment numbers coherent with the balanced compensation of employees data for 2013 (similar to what is produced for the UK).
The summary product output and GVA multipliers produced for 2013 for Northern Ireland can be accessed here.
An example of how the multipliers can be used to estimate the effect of an increase in demand for a given product is presented below.
The direct impacts upon an industry are often presented in monetary terms, i.e. increased exports or a change in Government spending. The following example uses the hypothetical scenario of an increase in demand of £5 million for "Basic metals and metal products".
The effect on output (using product by product based output multiplier)
The direct impact of an increase in demand of "Basic metals and metal products” will be a requirement to increase the total output of this product by £5 million to meet this additional final demand. To estimate the indirect effect on the industries that produce these products, we multiply the direct impact (£5m) by the Type I product output multiplier for this product grouping (1.31) giving a total of direct plus indirect impacts of £6.55 million.
The effect on GVA (using GVA product based multipliers)
The direct impact on total GVA caused by an increase of £5m in the GVA of products in the "Basic metals and metal products” group is an increase of £5m. To estimate the indirect effect on the industries that produce these products, we multiply the direct impact (£5m) by the GVA multiplier for this product grouping (1.36) giving a total of direct plus indirect impacts of £6.8 million. Please note that Type 1 multipliers underestimate the effect on the economy.