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!