Input-Output Analysis

Input-Output analysis creates a picture of a regional economy describing flows to and from

industries and institutions

Examples of Interrelationships Between Sectors:

• Sectors purchase from other sectors

• Sectors sell to other sectors

• Sectors sell outside the local economy

• Sectors buy outside the local economy

• Sectors pay their employees

• Sectors pay taxes

Households

Industry

Basic

ServicesGoods &

$

Inputs

Products

Inputs

$ $

$

$

Services

$ $

Labor

Overview of Community Economic

System

Input-Output Models

• An input/output table quantifies the transactions between sectors in an economy.

• It’s a “snap-shot” of the economy for a one-year period.

• By understanding these linkages, we are able to predict how a change in one sector will affect the other sectors.

• Multipliers can be estimated.

Example: Transactions Table

Selling S

ectors ($ m

illion)

Purchasing Sectors ($ million)

Agriculture Health Services Final TotalDemands Output

Agriculture 10 6 2 18 36

Health 4 4 3 26 37

Services 6 2 1 35 44

Final 16 25 38 0 79Payments

Total Input 36 37 44 79 196

Predictive Use of Input-Output Analysis

• Impacts are tracked throughout the economy

• Multipliers are derived from regional economic accounts

• Only local transactions are used to create the multiplier effect

Multipliers

What are Multipliers?

Multipliers measure total change

throughout the economy

from a one unit change

for a given sector.

Multipliers

• Direct effects represent direct or initial spending

• Type I - Direct and indirect effects include the direct spending plus the indirect spending or businesses buying and selling to each other

• Type II - Direct, indirect and induced effects include direct and indirect plus household spending earned from direct and indirect effects

Multipliers Continued

• Three multipliers are used to describe the economic impact:– Employment– Income (Value-Added)– Output (Receipts)

Interpretation of Multipliers

• You will often see values for multipliers in the media, the interpretation of these numbers typically causes confusion

Example 1– Type II employment multiplier (Ag) = 2.25

• When the Agricultural Sector realizes a 1 employee change, total employment in the study area changes by 2.25 jobs from direct, indirect and induced effects

Multipliers Continued

Example 2

Type II Income Multiplier (Ag) = 1.78When the Agricultural Sector realizes a $1.00 change in income, total income in the study area changes by $1.78 from direct and indirect linkages

Multiplier Cautions (Very Important)

• Multipliers are NOT interchangeable (i.e. employment and value added multipliers are very

different, thus you can’t use one for the other)• Not transferable to other study areas or across

different time periods• No differentiation between full-time and part-time

jobs• Results less certain for new types of economic

activity• They do tend to overstate the impact of change• Take caution for multipliers larger than 3

IMPLAN Software

• A talented person could probably figure out relationships for a 6 sector economy

• An economy with more than 500 sectors is another story

• IMPLAN software does the work for us and calculates multipliers

• IMPLAN is relatively expensive, hence the need for a partnership with the University

Pushing the local initiative

• “Kentucky Proud”

• “Buy Local”

• When we keep our money local, the multipliers are larger allowing more money to flow in the local economy, resulting in higher incomes for local residents

Local Examples

• The Economic Impact of Various Health Related Services on the Local Economy– Impact of Health Sector– Impact of a Rural Physician

Economic Impact of Health Care Sector

Estill County Health Care Sector Impact on County Employment

Direct Impact of Health care Employment

Indirect Impact of Health Care Employment

Induced Impact of Health Care Employment

Employment Multiplier

Total Impact Of Health Care Employment.

432 Jobs 25.5 Jobs 64 Jobs 1.21 521.4 Jobs

Source: 2000 IMPLAN Data Base

Estill County Health Care Sector Impact on County Revenue (Sales) Direct Impact of Health care Sector Output

Indirect Impact of Health Care Sector Output

Induced Impact of Health Care Sector Output

Output (Sales)

Multiplier

Total Impact Of Health Care

Sector Output (Sales) $20,172,564 $1,530,139 $2,961,219 1.22 $24,663,922

Source: 2000 IMPLAN Data Base

Interpretation

• Employment Multiplier: 1.21

For every employee hired in the health sector there are an additional 0.21individuals employed because of indirect and induced effects.

• Output Multiplier:

1.22

For every $1 of sales in the health sector there is an additional $0.22 of revenue generated due to indirect and induced effects

The Economic Impact of a Rural Physician in Kentucky

Other Interesting Potential Economic Impact Studies

• The Economic Impact of the new sports complex in Knott County

• The Economic Impact of Eco-tourism in Eastern Kentucky

• The Economic Impact of Agriculture in Kentucky

• The Economic Impact of a manufacturing firm leaving a rural town

Model Limitations

• Based on a set of assumptions that might restrict the model. Other modeling techniques can be used to provide a range of impacts, not one single number

• Economic impacts should only be part of the discussion. We should not ignore the following:– Quality of Life– Environmental Impacts– Social and Cultural History– Equity ImpactsTHIS IS WHY COMMUNITY INVOLVEMENT IS VITAL