“Magic” numbers and ice cream diets – the economic science behind ThinkIrish.ie

In response to numerous queries, we felt now might be a good time to offer an explanation as to how this campaign works and just what the connection between switching €20 a week to Irish goods and services and the creation of 20,000 new jobs is.

This blog might look like it could get too serious and make difficult reading but we promise to try really hard to ensure it doesn’t. If you’re a student of economics, go put the kettle on as there’s nothing new for you here but for our non-economically minded campaign supporters here’s our abbreviated man-on-the-street explanation of just why this campaign makes real sense.

Important to explain at this point, we’re not economists. But we have been ably assisted by some of the best economists in the country – thanks to Alan Matthews and Corina Miller in TCD. We hope we’ve done your work some justice!

So, deep breath…

It all begins with a thing called a “multiplier” and more specifically, an “employment multiplier”. Basically, that’s a magic number that determines how many extra jobs can be created for a specific increase in spend on goods and services produced here in Ireland. Sounds complex enough but in fact all it’s actually doing is helping us to predict what the “ripple-effect” will be if we buy more of the stuff that’s produced here.

It works in a pretty straightforward way too. As Final Demand (that’s spending by you and me) increases, a kind of chain reaction of economic events is triggered. The initial effect of our new spending sets into motion a series of additional spending and respending activities.

Maybe the best way to explain this may be to give an example;

Let’s say the overall final demand for a locally made ice cream (we’re thinking Brioscaí Cookies & Cream from Murphy’s in Dingle!) increases significantly, say boosting sales by €100,000 because a bunch of ThinkIrish.ie campaign supporters decide to move to an ice-cream diet! Murphy’s receipts then increase, but that is not the end of the money trail. In order to meet the increased demand, they’ll typically respond by increasing production by using some portion of the €100,000 to buy more inputs in the form of additional goods and services. The additional inputs for new ice cream production will include ingredients like cream, sugar, fruits, and chocolate; cartons and labels for packaging; more electricity and water; more labor; perhaps even new equipment; and so on. Economists might call this the Direct Impact.

But again, this is not the end of the money trail. Each of Murphy’s suppliers will respond in similar fashion. As demand for their products increase, so they too will increase their purchases of all the inputs they require for their production processes. Ultimately, the chain of input purchases will reach far beyond the sectors of the economy that are most obviously linked to ice cream production. Economists call this the Indirect Impact.

And we’ve not stopped yet! All of this activity generates more cash in the economy, incomes start to rise and it’s unlikely that us recession-weary families will stash all our increased income in a piggy-bank (‘tho we probably should!) More likely, we’ll spend some (or all of it) on a whole load of things; a treat for the goods, new shoes, maybe a deposit on that house that’s finally got a realistic price tag! And yes, you guessed it; the Economists have another term for this. It’s called the “Induced effect”.

OK, stay with us now, we’re getting to the sharp end!

Now, all of these (3) effects together generate an increase in the output that is generated in the economy. Those smart economist chaps have developed a number that will predict how many jobs will result from this new output so we can say that for every additional €1 million spent in this way, we can generate a specific amount of new jobs. Importantly, that number changes depending on where the additional €1 million is spent. So for example, if it’s spent on food and drink, we can use a multiplier of 13 (i.e. €1 million extra spent on food and drink would generate 13 new jobs). The number is higher if it gets spent on Irish tourism (23 jobs per extra €1 million) which makes a short break in the West very ThinkIrish.ie indeed! For the purposes of the campaign, we use a multiplier of 15 which represents a mix of spend from the food and drink and other household sectors we imagine our supporters might choose to switch their spend to.

Which brings us neatly back to the question of the 20,000 new jobs! Where does that number come from?

Well, let’s imagine it’s not just extra demand for Murphy’s ice cream (OK, now we’ve got caramal – honeycomb in mind) but the campaign managed to encourage every household in the country (that’s 1.3 million odd) to switch €20 of their weekly spend to lots of different stuff that’s made and grown here. Together we would generate an additional €1.35 billion in economic activity (Domestic Output) per year. Using our “Multiplier” of 15 (i.e. 15 jobs for every additional €1million spend), we get 15 x 1.35 billion or just over 20,000 new jobs.

And that’s how it’s done!

Weather's looking great for the weekend – enjoy it and keep thinking Irish!