The Space Economy: Understanding its Economic Multiplier

Money changing hands…

What is the Economic Multiplier?

The economic multiplier is a concept in macroeconomics that measures the impact that an injection of money (like government spending, investment, or consumer spending) has on the overall economy. The idea is that when money is spent, it creates more income for others, who then spend this income, and so on, leading to a larger total effect than the initial injection of money.

For example, consider a $1 million government spending program on infrastructure. The workers and contractors who receive this money then spend it in the local economy, for example at restaurants and shops. The owners and workers at those businesses then have more money to spend themselves, and so on. If the overall effect on the economy is, for example, $1.5 million, then the multiplier is 1.5.

The size of the economic multiplier depends on the marginal propensity to consume (MPC), which is the portion of additional income that a person will spend rather than save. The higher the MPC, the higher the multiplier, because more of the income gets spent and re-spent.

Application to Space Economy

The economic multiplier effect applies to the space economy in several ways, including:

Direct spending in the sector: When governments, companies, or individuals spend money on space-related activities, this has a direct impact on the economy. For example, NASA’s budget not only pays for rockets and other equipment, but also salaries for thousands of engineers, scientists, technicians, and other workers.

Indirect and induced effects: The direct spending leads to secondary effects` as the money gets spent and re-spent in the economy. For instance, aerospace engineers who earn salaries spend their income on goods and services, leading to incomes for others. Suppliers to space industries, such as manufacturers of components, also benefit from the spending and further spread the income.

Spillover effects: Perhaps the most significant way the space sector impacts the economy is through technology spillovers. The space industry has been a significant driver of technological innovation, from satellite technology and GPS to advances in materials science and computing. These innovations have spin-off effects throughout the economy, leading to new products, new businesses, and even entirely new sectors.

Long-term growth: The economic activity generated by space exploration can also have long-term effects on economic growth. This happens through the creation of new industries (like satellite television, GPS navigation, weather forecasting) and through the enhancement of human capital. The space industry often requires highly skilled workers, leading to higher education and training levels, which can have broad benefits for the economy.

While the initial spending on space activities might be substantial, the economic multiplier effect ensures that this spending can lead to even more significant economic benefits, for example NASA’s 2022 Economic Impact Report.