Economic impact analysis

Tue 03 April 2018

An economic impact analysis attempts to measure or estimate the change in economic activity in a specified region, caused by a specific business, organization, policy, program, project, activity, or other economic event. The study region can be a neighborhood, town, city, county, statistical area, state, country, continent, or the entire globe.

Types of Economic Impacts

Economic impact analyses often estimate multiple types of impacts. An output impact is the total increase in business sales revenue. In turn, local businesses use some of this new revenue to pay for goods and services outside of the study region, so the output impact is not synonymous with local business profits. A more conservative measure of economic activity is the value added impact, which estimates the increase in the study region’s gross regional product. The gross regional product (GRP) is very similar to the nation’s gross domestic product (GDP), and represents the total size of the local economy. This impact estimates the increase in local employee wages plus local business profits (not total revenue, like the output impact). However, the value added impact may overstate local profits when they are transferred overseas (such as in the form of dividends or investments in foreign facilities).

An even more conservative measure is the labor income impact, which represents the increase in total money paid to local employees in the form of salaries and wages. The increases in income may come in the form of raises and/or increased hours for existing employees, or new jobs for the unemployed. This is a measure of the economic impact on just personal incomes, not business revenues or profits. A similar measure is the employment impact, which measures the increase in the number of total employees in the local region. Instead of measuring the economic impact in terms of money, this measure presents the impact on the number of jobs in the region.

Another measure of economic impact is the property value impact, measuring the increase in total property values, and is a reflection of generated income and wealth, both personal and business.

Sources of Economic Impacts

In addition to the types of impacts, economic impact analyses often estimate the sources of the impacts. Each impact can be decomposed into different components, depending on the effect that caused the impact. Direct effects are the results of the money initially spent in the study region by the business or organization being studied. This includes money spent to pay for salaries, supplies, raw materials, and operating expenses.

The direct effects from the initial spending creates additional activity in the local economy. Indirect effects are the results of business-to-business transactions indirectly caused by the direct effects. Businesses initially benefiting from the direct effects will subsequently increase spending at other local businesses. The indirect effect is a measure of this increase in business-to-business activity (not including the initial round of spending, which is included in the direct effects).

Induced effects are the results of increased personal income caused by the direct and indirect effects. Businesses experiencing increased revenue from the direct and indirect effects will subsequently increase payroll expenditures (by hiring more employees, increasing payroll hours, raising salaries, etc.). Households will, in turn, increase spending at local businesses. The induced effect is a measure of this increase in household-to-business activity. Finally, dynamic effects are caused by geographic shifts over time in populations and businesses.

By Ruby Chirnside, Category: misc