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 Community Demographic Impacts Fiscal Impacts Impacting Project Social and Environmental Impacts Economic Impacts 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 Goods and Services Businesses Households and Government Capital and Labor

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 Direct+Indirect+Induced Multiplier = 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