ECONOMIC IMPACT ANALYSIS

Presented by

Mike D. Woods & Suzette Barta

Oklahoma Cooperative Extension Service

Oklahoma State University

can help community leaders predict changes in local output, employment and income resulting from a change in economic activity.

ECONOMIC IMPACT ANALYSIS

ECONOMIC IMPACT MODELS

Input/Output ModelsEconometric ModelsFiscal Impact ModelsSimulation Models

1. 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.

Rows Represent Sales

Columns Represent Purchases

Input-Output Table

Sector Primary FoodProd Textiles WoodPap PetroChemManufact Services FinalDmndTotalOutputPrimary 67 214 12 13 54 43 21 277 702FoodProd 29 81 5 2 6 1 4 580 706Textiles 3 4 60 2 2 3 11 207 293WoodPap 2 7 3 39 11 36 36 72 206PetroChem 28 15 29 8 71 94 81 159 485Manufact 10 11 3 4 82 250 60 956 1302Services 41 79 37 27 67 181 376 2360 3169Labor 124 62 47 30 72 299 841 134 4998Total Inputs 703 707 293 206 485 1302 3169 4998 11863

IMPLAN Software

A talented person could probably figure out these connections for an 8 sector economy.

An economy with more than 500 sectors is another story.

IMPLAN software does the work for us and calculates “multipliers”.

Examples of Applications

Tourists visit your town for a festival. How will their expenditures will impact the economy?

A new manufacturing plant is opening in your town and will employ 200 people with a payroll of $5 million. What will the total impact be?

Your local hospital is destroyed by a tornado. Sixty jobs are immediately lost, but how many more?

Drawbacks of I-O Models:

Does not directly assess the impact of government costs.

It is a static model and does not count for the inherent changes over time in a dynamic economy.

2. ECONOMETRIC MODELS

A statistical method called multiple regression analysis is used on either time-series or cross-sectional data to estimate the relationship between various economic variables.

The relationships estimated by this method are used to predict future impacts.

Numerous software applications, including MS Excel, can run regression equations.

Examples of Applications

Across the country, urban highways have increased property values. How much will property values increase in our city?

Through the years, increased municipal spending on economic development projects has been associated with increases in sales tax collections.

Dr. Dan Rickman at OSU predicts state gross domestic product, employment, etc, using a complex type of econometric model.

Drawbacks of Econometric Models:

Large data requirements may be restrictive.

Knowledge of statistical methods is necessary.

3. FISCAL IMPACT ANALYSIS

An effort to estimate the impact of a development or land use change on local government costs and revenues.

There are 4 basic procedures:– Determine population generated by growth– Translate population into public service costs– Project revenues induced by growth– Compare development induced costs with

revenues

LOCI Software:

Directly assesses the impact a project has on government costs.

Calculates net present value of a project.Calculates impact at either the county or

city level.Is not as good at producing multipliers for

income, output and employment.

Examples of Applications

A new housing development will raise property tax collections for the school district, but there are operating costs associated with each new student in the school district . What is the net fiscal impact for the district?

Should the Corps of Engineers build a dam? What are the costs and benefits of such a project?

Drawbacks to Fiscal Analysis:

Does not always consider secondary or indirect effects.

Is concerned only with public costs and revenues and does not always consider private costs or benefits.

Not as good at estimating income, output, and employment multipliers.

4. SIMULATION MODELS

A complex system that includes both an Input-Output model and other economic, demographic, and fiscal variables.

I-O models are static—a one time snapshot, but simulations are dynamic.

The addition of the forecasting element allows economic impacts to be measured over time.

REMI Software:

Combines the I-O model with complicated equations that describe the relationship between many economic variables.

These equations forecast changes over time as a result of the project in question.

Without these equations, REMI acts just like an I-O model with results similar to IMPLAN.

Drawbacks to simulation models:

Does not always assess the impact on government costs.

Due to huge data requirements, county-level models are not always available in REMI. Available at the state and regional levels.

Comparing Models

Software Strengths DrawbacksI-O IMPLAN County level,

understandable multipliers

Static, ignores gov’t costs

Fiscal LOCI Measures gov’t costs, city level

Not good at estim. multipliers

Econometric Many Dynamic Large data needs, complex

Simulation REMI Dynamic, good multipliers

Huge data needs, complex

Bottom line…

No single model can answer all the questions.

Important Considerations for Private Sector Impact Measurement

1. How many workers will be hired, and what is the expected payroll and expected value of production?

2. What is the multiplier effect?3. When will the items listed in #1 go into effect?4. Is the new economic activity associated with

the operation of the business or the construction?

5. Will the new economic activity stimulate construction in related businesses, housing, and other sectors of the economy?

6. Do the changes in employment, income and sales represent net or gross additions to the community’s economic base?

7. How does the new economic activity compliment the local economic situation?

8. Which people and businesses will benefit; which will bear the costs?

Source: John Gordon in How Extension Can Help Communities Conduct Economic Impact Analysis, 1982.

Important Considerations for Private Sector Impact Measurement

1. Within what governmental jurisdictions will new families live?

2. How many in-migrant families are expected & what is their expected income level?

3. How many school age children are expected?

4. How well will the public services and schools be able to handle the expansions?

5. Are there migration fees to cover additional public service costs?

Important Considerations for Gov’t Sector Impact Measurement

6. Will state and federal aid increase if population grows?

7. When will project be completed?8. Does the expenditure estimation procedure include

only the additional costs associated with the new growth?

9. How will new revenues be divided between city, county, and school district?

10. When will public expenditures for the project begin and when will the community begin seeing project-generated revenues?

Important Considerations for Gov’t Sector Impact Measurement

11. Will changes in demand for services change tax rates or levels of service?

12. Who benefits and who loses from project?

13. Will tax abatements (or other inducements) be used to encourage this growth?

14. Is the project capital or labor intensive?

15. What is the probability that the firm will remain in the area for an extended time?

Important Considerations for Gov’t Sector Impact Measurement

16. What are the income and multiplier effects of the new industry?

17. How will this development affect state aid to education and local property tax revenues in your state?

Source: George More & George McDowell in How Extension Can Help Communities Conduct Impact Analysis, 1982.

Important Considerations for Gov’t Sector Impact Measurement

1. Distribution – who will be affected?i. Will effects vary geographically?ii. How will different income groups be affected?iii. Which economic sectors will be affected?iv. Will the impacts vary over time?

2. Employment Related Impactsi. Will the jobs be satisfying?ii. Will commuting time and distance be affected?iii. Will the jobs be permanent or will they be sensitive

to economic trends?iv. Will the workers perceive the new jobs as an

improvement?

Important Considerations Related to Non-market Impacts

3. Population-Related ImpactsA. Demographic

i. How much in-migration will occur?

ii. Will the newcomers be very different from the “typical” families in the community?

iii. What value changes might occur?

iv. Can the newcomers be easily assimilated into the community?

B. Housingi. Will housing value change?

ii. Will housing quality change?

iii. What changes in housing ownership will occur?

iv. Will new housing be needed?

Important Considerations Related to Non-market Impacts

Important Considerations Related to Non-market Impacts

4. Community Ecologyi. Will communications networks be affected?

ii. Will religious organizations be affected?

iii. Will participation in community affairs be affected?

iv. Will different internal-external links appear?

v. Will satisfaction with the community change?

Important Considerations Related to Non-market Impacts

5. Political and Local Governmenti. Will leadership changes occur?ii. Will voter participation change?iii. Will public recreation facilities and use change?iv. Will physical safety of workers and residents

change?v. What short and long term health effects could

occur?

Source: Ron Shaffer in How Extension Can Help Communities Conduct Impact Analysis, 1982

Economic Impact Analysis

What is the question you are asking?What data are available?How much time do you have to

respond?Resources – Funding?How will you deliver the results?

For more info:

www.economicanalysis.com

(IMPLAN home page)www.remi.com

(REMI home page)http://www.ceds.gatech.edu/loci/loci_over

view.html

(a LOCI overview page from the Georgia Institute of Technology)

For more info:

www.rupri.org/cpan/ (Rural Policy Research Institute – Community Toolbox)

www.rd.okstate.edu/health/ok/okindex.html (Rural Health Works - economic impact studies of the health care sector for Oklahoma counties.)

QUESTIONS?