During the 2022 FIFA World Cup, it was reported that Qatar hosted more than 1.4 million visitors. When the COP27 summit took place at Sharm-el-Sheikh in Egypt more than 100 heads of State and more than 35,000 delegates were hosted.
When countries host business summits, trade conferences, intergovernmental summits, and major sports tournaments, there is an upsurge in the demand for facilities. How does this benefit the economy apart from foreign income? The local economy is boosted by direct expenditure by the visitors among others, host facilities, hotels, restaurants, and entertainment venues.
Economist John Maynard Keynes in his book The General Theory of Employment, Interest, and Money devised a measure to determine the national income equilibrium in closed and open economies and also described how the increments in national income will take place due to different injections into the income stream like investment, government expenditure, and exports.
The multiplier theory explains how the injections into the circular flow lead to more spending, which creates more income and influences aggregate spending by multiple amounts.
The multiplier effect means the increase in the final income arising from any new injection of spending. The spending or saving is determined by the marginal propensity to spend or save. Marginal propensity shows the proportion of extra income allocated to particular activities, such as investment spending, consumption spending, and so forth.
Government spending
The introduction of government brings two changes in the analysis, one in the form of government spending and the other in the form of taxes and transfers, which affect the disposable income of consumers and are reflected in the multiplier.
In an open economy with the introduction of foreign trade, the size of the multiplier becomes less as other factors, as the marginal propensity to import apart from tax rate enters into the analysis.
The marginal propensity, and in turn the size of the multiplier, is affected by many factors, like income, wealth, tastes and preferences, interest rates, and so forth.
The Keynesian analysis of the determination of income and employment assumes that involuntary unemployment is a normal feature of an economy that can operate below full employment. If the economy operates below full employment and there is an injection in the form of investment or government spending, then this will have an immediate effect on the income by an equal amount.
This is because, in the circular flow, expenditure by one entity generates an equal amount of income for the other.
But since the economy is operating below potential with available resources, the income earners will spend on consumer goods which will in turn create demand and will cause output to rise.
This process will continue until the economy reaches a point where aggregate expenditure becomes equal to output or income. The multiple by which the total income increases as a result of an increase in any of the autonomous components like investment, government spending, or exports is called a multiplier.
Autonomous expenditure
It means that GDP changes in response to a change in any autonomous component of the aggregate expenditure function. The magnitude of change in GDP resulting from a given change in autonomous expenditure is measured by the multiplier. The concept of the multiplier can be used in any situation, where there is a new injection into an economy like when the government raises its expenditure; when there is an increase in investment or increase in exports abroad, or when there is a reduction in the interest rates or tax rates, or when the exchange rate falls.
The value of the multiplier depends on various factors including the propensity to consume. Consumption propensity is the chief factor determining the multiplier. The higher the propensity to consume domestically produced goods and services, the great the multiplier effect.
The propensity to consume is determined by factors such as consumer income, wealth, prices, and taxes. The government can influence the size of the multiplier through changes in the tax rate, perhaps a reduction, which affects the disposable income of people.
The second factor is a propensity to save. Saving is what is left after consumption spending. The propensity to save is inversely related to the value of the multiplier. A higher propensity to save leaves less for consumption. If out of the extra income the population spends a major part of their money on purchasing imports, this demand is not passed on in the form of fresh spending on domestically produced output.
Kenya is an open economy engaging in the international exchange of goods and services and investments. The marginal propensity to import is the increased imports for a given increase in GDP.
Exports are determined by foreign income and output, along with the relative prices. Thus, these are assumed to be exogenously given. This implies that the higher the propensity to import, the lower will be the multiplier.
The fourth factor is available, excess, or spare capacity. An important prerequisite for the multiplying process is that there should be sufficient spare capacity for extra output to be produced.
The last factor is the magnitude of crowding out. Crowding-out occurs whenever an expansionary fiscal policy of the government fails to have a full multiplier effect on the economy due to rising interest rates which crowds out private investment in the economy.
Tourism
If we take the example of tourism, the Kenyan economy thrives on tourism. Tourism remains one of the top three domestic exports of Kenya, along with coffee and tea.
Post-2020 due to Covid-19, income from tourism was greatly impacted and we are now witnessing some recovery albeit slow.
According to statistics, “Employment in travel and tourism in Kenya represented nearly eight per cent of total employment in the country in 2021”. In Kenya, travel and tourism contributed 8.8 per cent of the GDP in 2019.
Since Kenya earns most of its foreign income through tourism and is fast evolving from leisure tourism to incorporating conference or business tourism, an emphasis on increasing tourism will lead to multiple positive effects. The first multiplier in tourism is the sales transaction multiplier. This is essentially when the number of sales that occur in terms of hotel rooms, and seats on domestic flights increases.
With the infrastructure works enhancing transport, better accommodation and conferencing facilities, Kenya should aggressively purpose to revive tourism and earn foreign exchange thereby bringing stability to the shilling and enhancing the revenues and benefits to the economy through the multiplier effect. BY DAILY NATION