Christmas and New Year are the peak times for retail spending. Many towns run campaigns to encourage residents to spend their money locally with slogans such as “Keep you town in business, by keeping your business in town”. Apart from the feel good factor, does it really work?

There are two economic concepts that might be helpful.

“Marginal propensity to consume” [MPC] describes how likely you are to spend more, if you get extra money. It is expressed as a percentage of a benchmark 100 units of extra money: if you receive an extra €100 and spend €90, your MPC is 0.9 or 90%.

A very well-off person is likely to have a much higher baseline spending than somebody who is not as rich. The well-off consumer is already buying everything they want and need, because they can afford to. As a result, if they happen to receive unexpected money, they are less likely to spend it and more likely to save or invest the excess cash.

A less well-off person is more likely to immediately spend extra money on all those things they need and want but couldn’t afford previously. The Christmas bonus distributed to people on social welfare will be paid this year. It is likely that those who receive it will spend all of it because they are probably doing without lots of things that would enhance their quality of life or the quality of life of their family. People who are less well-off have a very high MPC, possibly close to 100%.

It makes sense to give money to those people who are most likely to spend it and those with a higher MPC are usually families with school-age children, small businesses that make relatively little profit and households with large debts.

“Velocity”, is the speed of money through an economy. Money spent locally in smaller businesses is more likely to be spent locally.

There seems to be an economic rationale for spending more or your income locally where it will have maximum impact and move more quickly throughout the local economy.