tgp - Online Tutorial - What are linkages and the multiplier effect?

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Online Tutorial - Economic and Industry

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What are linkages and the multiplier effect?

Linkages and multiplier effects are used to explain the relationships between industry and the creation of wealth in an area. Linkages describe the relationships between industries, and the multiplier effect increases the amount of industries in an area (using linkages) to create more jobs and hence wealth and the overall image of an area. The multiplier effect can be described as the opposite of the 'spiral of decline', where industries move away, creating high unemployment and social deprivation and crime.

Linkages

Linkages describe the relationship between industries. There are three types: vertical, horizontal and diagonal. Industries rely on certain other ones to provide raw materials or products to sell: this means that certain industries may attract others to an area if they were to be attracted to it. The diagrams and text below explains more about each type of linkage, using examples:

1 - Vertical Linkage (burger industry)

Vertical linkage is when one industry controls all stages in the production line. In the diagram below, using the burger industry as an example, if a burger industry was to set up in an area, it would attract other industries to the area, such as the processing and packaging companies - the amount of those industries would depend on the success of the controlling industry. Farmers would then sell more of their animals to those industries. The amount of industry, jobs and wealth therefore increases in an area, controlled by the third stage.

Vertical Linkage - © tgp

2 - Horizontal Linkage (car manufacturing industry)

In horizontally linked industries, one industry is supplied by many others. One excellent example of this is the car industry - one which many governments try hard to encourage. The reason for this is that the sheer amount of parts that go into a car means that there are probably hundreds of industries involved in manufacturing parts that are then assembled in the car factory. The diagram below shows only a tiny fraction of the industries that manufacture car parts, but is designed to show that once a car factory is set up in an area, many others will follow, creating a huge number of job opportunities and increasing wealth in an area considerably.

Horizontal Linkage - © tgp

3 - Diagonal Linkage (telephone industry)

Diagonally linked industries are so called, because one industry supplies many others. The example shown in the diagram below shows a telephone manufacturing industry. If one of these were to set up in an area, it will attract industries that supply other industries, such as those companies which supply carphones, school and office telephone network systems and domestic telephone supply companies. By doing so, job opportunities increase and so does wealth.

The Multiplier Effect

The 'Multiplier Effect' is a method by which job opportunities and wealth are created by attracting new industry into an area. By introducing a new industry, it is hoped that industries 'linked' to that industry will follow (see above for linkages) and increase the amount of job opportunities and wealth of those people with the resulting jobs.

This has many knock-on effects that 'multiply' the wealth in an area: people have more money to spend, and so local shops and other services benefit and can possibly expand both their range of services and size, and in turn all of these effects can create the money needed to enhance the infrastructure and image of the area. The result of this is more industry is attracted to the area. This is shown as a flow chart below:

Key to colours on diagram:
Yellow - this colour represents an increase in industry in the area.

Green - this colour represents an increase in job opportunities in the area.

Pink - this colour represents an increase in the knock-on effects in the area, such as increased wealth and infrastructure.

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