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Intro to Economic Impact Analysis

In: Business and Management

Submitted By lgeise
Words 2004
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Economic Impact Analyses analyze the economic effects of a particular project in a particular area. This analysis can cover a region as small as a neighborhood and as large as the world. The main variables analyzed include revenue, profits, wages, and jobs. They consider the direct impact the economic impact has on an area as well as indirect impacts. For instance, you can analyze the total number of employees a firm will hire if it builds a new factory. You can also analyze what this increase in employment will do to other non-related industries in the area. These newly employed workers will have more money to spend at a local store which will in turn create more profits and potentially more jobs. It typically analyzes activity before the project and after the compare the changes and the impact of the project. This is typically done by measuring the difference in economic activity assuming the economic event occurs and then assuming it does not occur. This is called the counterfactual case. An economic event can be defined as a new business moving into a region, a new policy or government program, or any other activity that produces some sort of profit. This is useful to determine if a particular project is worth investing in (Southwestern Oklahoma State University, 2012) .

The main types of impact analysis include output impact, value added impact, labor income impact, and employment impact. There is also a property value impact. An output impact measure the total increase in sales revenue. This profits are not all used directly within the region so this impact does not show just local business profits. The value-added impact is a a measure of how the economic activity changes in the region's gross regional product. This is a more specific regional analysis. It shows the impact of the increase in local wages and business profits. This form of analysis has the problem of potentially overstating a region's profits if they are transferred outside of the region. The labor income impact shows the increase in the total money paid to local employees in salaries and wages. This change in income may come from a raise, increased hours worked, or additional jobs that were added affecting the unemployed. This shows the effect on personal incomes instead of business revenue. The employment impact analyzes similar effects. This measures the increase in the number of total employees in a region. It doesn't measure the impact in terms of money, but instead in the total number of jobs in the region. A property value impact measures the increase in total property values caused by the additional generation of income and wealth (Clower, 2011).

Economic Impact analysis are used to determine the effects of some sort of investment. An investment could range from the addition of a factory to the creation of a new government program. They analyze how this investment will impact various components of the regional economy. This allows for more efficient allocation of resources among competing projects. It also allows decisions to be made about policy that might affect investment. For instance, this could be used to determine how a new tax might affect attracting or already existing businesses in a region. It also gives politicians and policy makers actual numbers to test political strategy and appropriately plan to change strategy.

Economic impact analysis includes several basic models that are used in analysis. Input-output models consider the suppliers of labor inputs to regional industries and the purchases of regional outputs. The components considered in the earnings include wages and salaries, proprietors' income, directors' fees, and employers contributions for healthcare minus personal contributions for social insurance. The household column in this analysis is based on personal consumption expenditures. The direct effects in input-output models analyze the direct activities of the project, the effects in terms of output or employment. The indirect effects in this model show the impact on firms that supply the activity that is defined in the direct effects. The induced effects show the impact of spending by households caused by the direct and indirect effects. There are several assumptions that go along with input-output models. It is assumed that there are constant returns to scale, linear and homogenous product function, perfectly elastic factor supplies, and constant technology (University of Minnesota, 2013) .

Another main type of economic impact model is the economic simulation model. These tend to be more complex and deal with econometric and general equilibrium models. The one benefit of these models is that the forecast the impacts caused by future economic and demographic changes.

Input-output models can be analyzed through several programs. The three most common are IMPLAN, RIMS-II, and EMSI. IMPLAN began creating economic impact modeling data in 1976. This data has been adapted and updated over the years to include more data sets from additional regions and sectors (IMPLAN, 2014) . RIMS II was developed in 1970's by the US Department of Commerce. It is a relatively inexpensive option, but it also very simplified in terms of its capabilities. These systems are best for analyzing project specific analyses. This is due to the more static nature of the programs.

Economic Simulation models are typically analyzed using a REMI Model. REMI was created in 1980 and is a hybrid of input-output and econometric models. It is probably the most complex of the modeling systems. It allows a researcher to create very complex and dynamic models and analyze them over time. However, it is very expensive and with its complexity, it can be difficult to use. REMI is primarily used to analyze how actions or initiatives change dynamics and consumer behavior in the market. For example, it offers specific components to analyze how a tax policy would affect a region. (Lynch, 2000)

These modeling software have been used in countless research. They provide an excellent tool for quantitative economic research. An example of using an input-output model in research is the study by Kim, Chon, and Chung to analyze the economic impact of the convention industry in South Korea. They used an input-output model to examine the effects of this industry on output, employment, income, value-added, and import. They found that the economic impact of the convention industry was very significant on the Korean economy. The highest multiplier for this study in terms of output was the business consumption expenditures sector. The value of this multiplier was found to be 2.5346. This is directly related to the convention sector, so it is logical that this would be the largest. In term of the employment multiplier, the restaurant industry experienced the highest increase. This multiplier was found to be 0.1489. The largest income multiplier for this study was Education and Medical services. This value was found to be 0.6741. The largest value-added multiplier was for finance/insurance with a value of 0.9543. The researchers also found that the total expenditures by foreign delegate and convention hosts were approximately $66 million and $73 million US dollars respectively. The researchers also noted that because Korea is quite small, the impacts will occur at more of a national than regional level (Kim,Chon, Chung, 2002).

Another interesting use of economic impact analysis is the study on tobacco consumption on the poor in Bangladesh. The researchers sought to determine the extent of tobacco expenditures in Bangladesh and to compare this with the potential investment in food and other essentials. The researchers found that the poorest households in Bangladesh as twice as likely to smoke as the wealthiest households. They also found that the average male smoker spends twice as much on cigarettes as is spent on clothing, housing, health, and education combined. This paper uses a very simplified economic impact analysis model and focuses on the differences in household expenditures on cigarettes compared to other basics (Efroysmson, et al. 2001).

Economic impact analysis has also been used to analyze tourism in the Seychelles. This study focused 1991tourism expenditures on incomes, employment, public sector revenue, and the balance of payments in the Seychelles. The researchers found that the impact varies significant depending on their country of origin. They found that this difference is primarily a result of the different magnitudes of expenditure rather than to variations in the size of the multiplier by country of residence. The researchers found that the largest multiplier value was in the communications industry as well as the air transport industries with a value of 1.54. The largest country expenditure for origin of tourists was found to be the UK with tourism expenditure of 90,649 in terms of local currency. (Archer & Fletcher, 1996)

Researchers also analyzed the economic impact of sporting events. They focused primarily on the direct expenditures by tourists associated with the event but stressed that it is important to only count that expenditure only if it would not have occurred without the event. They specifically focused on tourists that intentionally timed their visit to coincide with a particular sporting event. The researchers used an input-output model to analyze the host economy. This paper does not specifically model a situation, but instead discusses the difficulty of modeling complex situations such as tourism for a particular event. The researchers suggest that surveys are the best method for analyzing this type of tourist data on a region (Burgan & Mules, 1992).

Another interesting use of economic impact analysis is analyzing the indirect and direct costs associated with a migraine. I found this application particularly interesting. The researchers analyzed whether migraine sufferers incurred greater costs than those without migraines. The researchers found that migraine sufferers had higher direct medical costs over a six month period with $522 versus $415 spent by non-migraine sufferers. They found that this was mostly a result of increased number of physician visits by those with migraines. They also found that the indirect cost due to lost productivity were more than $200 for those with migraines. This brought the total direct and indirect costs for people with migraines to $1,242 versus $929 for those without migraines. They further researched the costs for those with severe migraines compared to moderate ones and found that people with severe migraines had higher direct and indirect costs compared to those with moderate migraines bringing the costs to $1656 and $685 respectively. This is a really interesting application of economic impact analysis in a difference sector. This has implications for employers, insurance companies, and those with migraines (Edmeads & Mackell, 2002).

Economic impact analyses are very effective ways to analyze the economic effects of a particular event. This methodology and programs used to analyze them have implications in research for a wide variety of sectors. It is important to understand how these work in order to determine the effects and potential of a particular project or event.

Word Count: 1775

Resources:

• Archer, B., & Fletcher, J. (1996). The economic impact of tourism in the seychelles. Annals of Tourism Research, 23(1), 32-47.

• Burgan, B., & Mules, T. (1992). Economic impact of sporting events. Annals of Tourism Research, 19(4), 700-710.

• Clower, T. (2011, October 27). Overview of economic impact analysis.

• Edmeads, J., & Mackell, J. (2002). The economic impact of migraine: An analysis of direct and indirect costs. Headache, 42, 501-509.

• Efrosmnson, D. (2001). Hungry for tobacco: An analysis of the economic impact of tobacco consumption on the poor in bangladesh. Tobacco Control, 10(3), 212-217.

• implan.com 2014

• Kim, S. S., Chon, K., & Chung, K. Y. (2002). Convention industry in south korea: an economic impact analysis.Tourism Management, (24), 533-541.

• Lynch, T. (2000, October). Analyzing the economic impact of transportation projects using rims ii, implan and rem. Retrieved from www.cefa.fsu.edu/content/download/47393/328597/../econimpact.pdf‎

• Southwestern Oklahoma State University. (2012, December).Economic impact analysis. Retrieved from http://www.swosu.edu/cebd/remi.htm

• University of Minnesota. (2013). About economic impact analysis. Retrieved from http://www.extension.umn.edu/community/economic-impact-analysis/about/…...

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