Office of Planning & Budget
© UC Santa Cruz
How economic multipliers work
When the University and its students and employees spend dollars in the community, local businesses and individuals receiving these dollars in turn spend a portion of them in the local area. The recipients of that second round of spending also expend a certain amount locally, and the process continues through successive cycles. Because this spending and re-spending are induced by, and would not occur without, initial expenditures, it is reasonable to attribute the total monetary flow of all such spending cycles to the University.
It is impossible to trace each University-related dollar through the re-spending process in order to determine the exact total of local business volume attributable to the University. However, a standard assumption of economic theory is that those receiving University-related dollars will probably use them as they would money from other sources.
Economists have developed the concept of the "economic multiplier" to help calculate the total economic activity (often characterized as “direct,” “indirect,” and “induced” spending) which results from these successive rounds of re-spending. Using its accounting records, as well as surveys of students and employees, the University calculates the direct expenditures due to its presence in Santa Cruz. Indirect effects are the economic effects on the industries that supply UC with goods and services; the induced effects represent additional spending due to the household spending patterns of UC students and employees. For simplicity, this report refers to the combination of direct, indirect, and induced effects as simply “total economic activity.”
Basis for University expenditures
Direct expenditures by the University for both operating and capital expenditures were provided by the UCSC based upon information recorded in the campus accounting systems.
By far the largest University local expenditure is its investment in employee salaries (who, in turn, spend much of their earnings in the local economy). These purchases by University employees play a major role in the economic vitality of the community.
UCSC also spends a large portion of its operating budget in the local economy through purchases of supplies, equipment, and services (including on-campus student housing and food services) and awards construction contracts to local firms.
Campus faculty, staff, students, and visitors to the campus spend funds in the local area. Student spending also accounts for substantial impact to area retailers and restaurants.
In the economic analysis model, this initial spending by the campus is called the "direct effect." The model provides an estimate of the campus's direct effect for the Santa Cruz region.
The full impact of UCSC spending on the Monterey Bay regional economy is greater than the total of the University's direct spending on salaries and wages, goods and services, and construction. This is because money spent by the University and its students and employees in the local community is spent again by the local businesses and individuals receiving these dollars. In effect, the original dollars are spent and re-spent, creating a “multiplier” effect in the local and State economy.
In the economic analysis model, the total economic activity (often characterized as “direct,” “indirect,” and “induced” spending) which results from these successive rounds of re-spending is called the "total impact."