Rugby World Cup Economics

I was wondering for a few months whether the Rugby World Cup would actually benefit New Zealand economically. I couldn’t quite get my head around how the boost in spending by tourists would even cover the costs associated with the tournament, let alone provide economic gains OVER the cost. And on top of that, whenever I read an article with statistics about the extra tourists and their spending, it seemed as though the numbers were complete guesses as they varied between every single article.

Then I learned about an economic theory called the Multiplier Effect. It explains how our economy can benefit hugely from the World Cup as a result of tourist spending. Let me explain the background to the economics behind the World Cup, and then how the Multiplier Effect works.

Extra spending by any New Zealanders that occurs as a result because of the world cup is not included in any figures about the economic benefit from the tournament. That’s because we assume all New Zealander’s income is fixed in the short-run, and if they spend their income on World Cup-related goods, that’s not extra spending in the New Zealand economy – it’s simply spending in a different area of the economy.

The boost to our economy comes primarily from the extra tourists we attract directly because of the tournament. Reserve Bank figures estimated the number of tourists that would visit NZ during the World Cup at 90,000, and put the amount they would spend at $700 million. These figures may or may not represent the actual figures, but those will come out sometime soon. I’ll use those figures for the purpose of this post.

$700 million is not the total benefit that our economy gets. This is where the Multiplier Effect comes in.

The Multiplier Effect says that cash injections into an economy are multiplied through the economy as people receive a share of the income and then spend a part of what they receive.

Let me run through this. Let’s say a tourist spends $1000 at a New Zealand clothing shop and the company’s profit from this purchase is $100. That $100 goes into the pocket of New Zealand shareholders. Each of those shareholders will then save a proportion of that income, but spend the rest at other shops within New Zealand. Each of those people who then profit because of that purchase will in turn save a proportion of that profit, but spend the rest within New Zealand.

The Multiplier Effect means that money from that initial tourist’s spending flows through the whole economy, and its effects are multiplied as it goes.

The Multiplier Effect actually has a formula which you can use to calculate the multiple by which the initial spending will be multiplied in the economy. I don’t have the necessary information to calculate the multiple correctly, but I’ll tell you the formula so you understand it better.

Multiplier = 1/1-MPC

“MPC” is the Marginal Propensity to Consume. This is the mean percentage of the extra income that each person in the economy spends after they receive it. So let’s say that after taxes and what they save, the initial clothing store shareholder spends 80% of what they received in the first place. 0.8 is then their MPC value, and you can use this to calculate the multiplier.

If we used 0.8 as a complete estimate and put it into the formula, this would give us a multiplier of 5. This means that the estimated $700 million that tourists were expected to spend in New Zealand is multiplied by five in order to see the actual value it brings to the New Zealand economy. That gives us a (completely estimated) value to the New Zealand economy as a result of tourist spending of $3.5 billion.

I found this theory very useful, as without it I simply couldn’t understand how the World Cup was going to benefit New Zealand that much. Hope you learned something too!

The Branded World

Apparently Italian towns used to be famous for small family-owned shops that specialised in creating and selling individual types of goods – shoes, bags, wallets, shirts etc. But on each of my trips to Italy, I’ve had a hard time finding a single one of them. No matter where you go in Italy, whether it’s a big city like Rome or Milan, or a small town like Padua or Siena, you’ll see the same shops. You’ll see Gucci, Prada, Dolce & Gabbana, Louis Vuitton, Burberry, Mont Blanc, Hermes… – you know the rest. No matter whether you’re looking for shoes or a wallet, you’ll be able to find it – but you’re going to find it at a shop you can find in almost every other city in the world.

Think about that. These big brands have killed off the individual sellers that used to make Italian towns so special and unique. The main streets of each town or city you visit are lined with exactly the same shops. Before you even get to a town, you know what you’re going to see there. And it’s the same all over the world. Literally almost every single city and town I’ve been in in the past few months, in Europe and Asia, have had all of the same shops.

But that fact makes you wonder how the big brands survive. No, not just survive, they flourish – they’re each doing hundreds of millions, if not billions, in sales. If you can buy exactly the same product in your home town, why bother buying it somewhere else? Or at the very least, why bother buying it in one town in Europe over the next?

By no means am I suggesting that the power of these big brands be curbed. I’d be the last person to suggest that. They’re all over the world because they’re playing the game right and their products are desired. It’s sad for the small sellers and the people who used to buy their goods, but you can’t be sorry for them.

I just find it an interesting phenomenon, that we can travel half the way across the world to remote towns in foreign countries, and find exactly the same shops as we can in our home country. It’s removed a lot of what made traveling fun, by discovering shops and products that you could never purchase at home. And it’s all gone now.

This demonstrates the shift that the world has undertaken in perhaps the last fifteen years. We’ve moved to become the Branded World. Brands rule almost every industry. We’ve lost the subtleties that used to make purchasing fun, in favor of brands as a symbol of status and affluence.

In New Zealand, each suburb used to have a local butcher, fruit and vege shop, and a bread shop. But the big-brand supermarkets killed that. We chose convenience and price-cutting in favor of relationships with our locals and perhaps higher quality. There’s nothing wrong with that, except for the fact that many people say they wish they still had local shops. In the Branded World, you can’t have both – there isn’t enough room in the markets.

The Branded World is one in which millions of people worldwide walk around with bags that look exactly the same. Apparently it’s meant to symbolize people’s wealth, only there’s no way of telling whose bag is a $2 knock-off. The Branded World is one in which you’ll find a Disney flagship store on a beautiful Venetian street. It’s a world where you’ll find two or more shops which are exactly the same within 50 metres of each other.

The Branded World is one in which we all willingly buy things that make us look the same.

It’s a world we’ve chosen and love. Only sometimes you have to wonder why.

New Zealand’s Future: Using Our Natural Resources

Bear in mind that everything I say in this post is said simply because I love New Zealand and care about it having a great future in the world. But I seriously wish we’d do some things differently. We deny ourselves the growth that our natural resources could give us, and we have political parties that don’t know that correlation does not imply causation. Those are the two things that have been frustrating me most recently.

I’m not one to get involved in New Zealand politics. But Sir Paul Callaghan’s talks about giving NZ a prosperous future have been making me think a lot more about how we can go about doing that. And it frustrates me to no end seeing our politicians doing exactly the opposite to most of the advice Sir Paul gives. So, like any blogger who gets very worked up about an issue, I thought I’d have a public bitch about it and offer my personal opinion on the issues. Thank you all for the opportunity.

Sir Paul Callaghan has repeatedly said that the only way for New Zealand to achieve economic growth and development is through sustainable innovation. He states that tourism is clearly not sustainable, citing the fact that there is a clearly defined limit to how many people can do the Tongariro Crossing each day. Completely true. So Sir Paul says that the way we achieve economic growth depends on our entrepreneurial talent, and how we nurture it. I completely agree, but I would not rule out the use of our natural resources too quickly.

Many people forget that New Zealand has one of the largest EEZ’s (Exclusive Economic Zones) in the world. In fact, our EEZ stretches to fifteen times the land area of our physical country. The ocean that we control has an incredible amount of resources in it, including oil. Now don’t get me wrong – I appreciate the value that our “clean green” image gives our country, and by no means do I want to destroy our tourism industry. I would oppose any huge mining project on the mainland in an area that tourists actually visit and notice. But how about hundreds of kilometers out at sea? Would anyone ever notice a few oil rigs? I doubt it, and yet the value that they could bring to our economy is enormous. A few oil projects would contribute very noticeably to our GDP.

Of course things could go wrong. There’s always the possibility that a disaster could occur on one of these oil rigs. But, like anything, it’s risk vs reward. And in my opinion, the value that using our natural resources could bring to New Zealand is far greater than the risk of a potential disaster. We would invest hugely in safeguards against disasters, and have plans ready to be put into action immediately in the event that something did go wrong. We would also, of course, use the most modern and safe mining and exploration methods in the world.

People often wonder how it is that Australia is powering ahead of New Zealand each year. It’s obvious – they’re smart enough to use their natural resources. And at the same time, they still have a huge tourism industry. I believe that in order for New Zealand to continue to grow we need to focus on three things – tourism, intelligent use of our natural resources, and sustainable innovation (nurturing entrepreneurship).

Now, I appreciate that this is perhaps a little bit of a hot topic given the Rena ship disaster in New Zealand. But this is where New Zealand needs to forget the word “green” for a minute, and just think logically. A few days ago, after the Rena showed that it had an oil spill, Phil Goff went straight to stating that this disaster should end all deep-sea drilling. He said: ”There shouldn’t be deep-sea drilling until we know there are safeguards in place that can absolutely be relied upon”. Think about this. The captain of a ship makes a massive error and runs the ship into the reef. Unfortunately, this leads to an oil spill from the ship. And by Goff’s logic, this means we should end all deep-sea drilling in New Zealand.

If you go by that logic, we should stop using plastic packaging on products simply because our rubbish bin blows over in the street. This is what I mean by our politicians do not realize that correlation does not imply causation. Simply because an oil spill and deep-sea drilling both involve the word “oil” does not actually mean that they are related or caused by similar things. But since this is a “green” issue, we don’t tend to think too much about it and we’ll all go to arms against anyone or anything that talks about mining or oil.

The point I’m driving at is that we need a political party to be strong about using New Zealand’s natural resources, and realize that we are insane to deny ourselves the growth that intelligent use of our resources could bring. Sir Paul Callaghan’s idea of sustainable innovation to grow New Zealand’s economy is perfect – but it’s not as easy to master. Innovation, to a large extent, depends on luck. Use of natural resources is more solid and depends less on luck. I believe a combination of the two is required.

Alright, that wraps up my complaints about New Zealand policy for today. Well in all honesty it doesn’t even cover a fraction of them, but I figure I’ll get enough flak for going against the status quo “green” policies. I’ll end on the note of suggesting that if you haven’t yet watched any of Sir Paul Callaghan’s talks, please do watch one such as this – it’ll get you thinking about how we can make New Zealand a country that has a place in the world.

Users Lie

Something I heard a lot of talk about at the Future of Web Apps conference I’ve been at recently regarded how to determine whether an idea is viable or not. There are a lot of different ways to determine this, from building the product and seeing if they like it or consistently testing parts of the product. Many people cited the lean startup strategy as the best way to find a viable idea, and I’d tend to agree.

But what there was consensus on was that all users lie. If you pitch your startup idea to someone, nine times out of ten the person you’re asking will give you a fake reply. They’ll tell you they love it and it’s the best idea ever and that they’d definitely use it. I’ve seen this countless times with Duo recently.

So obviously just asking users whether they’d use it or not doesn’t work. They’re all going to give you a good response just because people don’t like hurting others’ feelings or putting people down.

Therefore, how do we work out if people would actually use the service?

The general consensus at Future of Web Apps was that you should charge people for the service starting immediately. If people pay for it, they’re obviously going to use it. Money doesn’t lie.

Getting people to pay immediately also serves other purposes. It immediately gives you a source of revenue, if any do actually want to use your service. It lets you see more quickly which users were telling the truth and which were lying. And in the long-run, it looks incredibly impressive to any investors if you can show that you already have paying users.

Food for thought, really. Not all businesses even have a business model that requires charging users. But in any case of your product and business, it’s worth being aware that what your users say to you rarely is the truth. A better bet is to do Twitter searches for your product. That would more likely represent the real sentiment about your product.

About My List of Top Web Apps

I’m regularly asked things like “How do I send lots of big files to someone easily?”, or “I hate Flickr/Picasa – what’s a better alternative?”. Because I spent a huge amount of my time researching and reading about technology startups an the apps that they build, I’ve found that I’m usually able to answer these questions.

Someone suggested to me that I write a list of all the top web and iPhone apps that I use for different things. So, I’ve started that list. You can check it out here, or just by clicking the link at the top of my blog.

It’s very much a work in progress, and it will never actually be finished. I’ll add to it continually, whenever I think of a new app for a certain category, or if a new app launches.

I hope that you’ll find it useful for two different purposes. If you know that you’re looking for, for example, a better way to search for flights then you can view my list and find the category (travel) and find some of my suggestions. Or, if you’re just looking to find some new web apps in any category, then just browse through the list and check out some of the websites.

I don’t pretend to know of every good web app in existence. So the way the list can be best is if you guys can help me build it. If you think of a website or app that I should have in the list, just send me an email with it and I’ll add it to the list.

I’m interested in any other thoughts you guys have about the list, whether it’s a way I could do it differently or some immediate other website suggestions – so leave a comment or email me!

I’ll Be At The Future of Web Apps Conference in London

Some of you may know that next week I’m heading to London for the Future of Web Apps conference. If you haven’t heard of the conference, it’s one of the major European tech event of the year. I’ve watched it with huge interest for the past couple of years, and this year I’m lucky enough to be attending.

I’ll be covering the event for Social Media NZ, so be sure to keep up to date with the Twitter feed and website to see the event covered. I’m hoping to be able to relate the talks to a New Zealand context, and it’s my hope that whether you’re an individual in NZ or a business, you’ll be able to learn as much as I am by being at the event.

I previously wrote a post on SMNZ outlining the talks that interest me most, so you know which stream I’ll be watching. The conference runs over two days, and has two separate streams – one covering more of the business/marketing side of web apps, and the other covering the technical development. I’m obviously more interested in the business/marketing side, but if there’s a specific talk in the technical stream that lots of you would like me to cover then let me know and I’ll be happy to cover it for you!

Hope you all have a great week and have time to tune in to Future of Web Apps.