Impact Analysis
• Assessing the change in local economic activity as a result of some change in the community
• Some potential issues– What if we build a new prison?– What is the contribution of agriculture to the local
economy?– What might be the effects of a new residential
development?
• Impact analysis can help with decision making and planning
Today’s Goals
• Introduce the basic aspects of economic impact analysis
• Review one use of economic impact analysis
Components of an Impact
ImpactingProject
DemographicImpacts
EconomicImpacts
FiscalImpacts
Social andEnvironmental
Impacts
Community
Other major developments
Impact Analysis Requires We Understand Local Economic
Structure• Relationships between:
– Households– Businesses– Institutions
• There are different aspects of impacts– Local versus non-local– Monetary versus non-monetary– Primary versus secondary– Private versus public
An Economy is Less Complicated than We Often
Think It Is
Businesses Householdsand
Government
A Number of Markets
• What are useful frameworks of economic theory in such instances?– General Equilibrium– Keynesian Income Accounting
Some Applications of Economic Impact Analysis
• Impacts of new or expanding businesses
• Impacts of closing or contracting businesses
• Economic contributions of an industry sector
• Recreation/tourism development
• Impacts of a new residential development
How Do We Measure Impacts?
• Changes in industry output
• Changes in local employment
• Changes in local income
• Local population change
• Effects on local government and school districts
• Others
Impact Analysis is Founded in Two Aspects Economic
Theory• National Economic Structure
– Keynesian Income Identity• Y = C + I + G + (X – M)
• Models of Markets– GE models– Neoclassical Growth Models coupled with
household models• Y = a(k,L)• U = u(X)
What Is a Multiplier?
• A multiplier quantifies how a change in one sector of the economy impacts the entire economy
• From an education perspective, it is an intuitive approach to understanding economic linkages
Several ways to calculate a multiplier
• Economic base multiplier
• Input-output models (Leontief)
• Both systems are demand driven (assume an exogenous change)
Economic base
• Divides economy into two sectors– Exporting (basic)– Non-exporting (non-basic)
• Takes the ratio of the change in total to the change in basic
• Multiplies it by the change in basic activity• In practice, it is hard to divide the economy
into two sectors
Input-Output Models
• Descriptive model of a local economy
• Industry purchase patterns– Industries buy from and sell to other
industries
• Institutional purchase patterns– Households– Governments
I-O approach: Three Components of a Multiplier
• Direct effects are changes in the industry directly affected
• Indirect effects measure changes in inter-industry purchases in response to direct effects
• Induced effects measure the effects of changes in spending as the number and income of households changes due to changes in production
Simple Multiplier Formula
Multiplier =Direct+Indirect+Induced
Direct
Example: 100 mining jobs (direct)
50 canary and shovel jobs (indirect)
20 restaurant jobs (induced)
multiplier = ????
Q: What affects the size of the multiplier?
Applied Analysis
• Multipliers are often used in a policy framework
• What are some of the reasons for using multipliers in recreation studies?
Local Employment and Income from Outdoor Recreation at Selected BLM
Sites
• Kriesel et al (1996)
• Documents the economic impacts of expenditures by visitors to 3 representative BLM sites
• Uses a variety of assumptions– Different geographical range– Total and “growth only” effects
Recreation Demand
What are the Direct Impacts?
visitor spending
(IMPORTANT DISTINCTION: FROM OUTSIDE THE REGION)
hotels, restaurants, food, gas, supplies
here, recreation is an EXPORT activity, bringing outside money into the economy
What are the indirect impacts?
Some of these goods will be bought locally and some will be imported (“leakages”).
Recreation Demand
Local firms supplying recreation and inputs will see an increase in demand, and they will need to buy inputs and labor, too.
Induced. Of course, with all these new jobs there is new money (and new people) in the economy, generating additional jobs in retail, services, etc.
Methods
• Estimate total recreation visits• Estimate expenditures per visit• Define the market area• Separate resident and non-resident
expenditures• Estimate impacts from:
– Non-resident expenditures (growth effects)– Combined resident and nonresident expenditures (
interdependence effect)
Discussion
• How and why would these multipliers be used?
• Who would use which multipliers in a policy framework?
Strengths--What Multipliers Provide
• A low-cost, intuitive understanding of some basic economic impacts– Changes in industry output– Changes in the number of jobs– Changes in local income
Weaknesses
• Misuse
• Improperly calculated/interpreted
• Only give a partial picture
