The Basics of Economic Impact Analysis


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The Basics of Economic Impact Analysis

  1. 1. WelcomeThe Basics of Economic Impact Analysis
  2. 2. AgendaDashboardSpeakersQ&AFollow-Up
  3. 3. Celine FavreauProject ManagerSaskatchewan EconomicDevelopment Association (SEDA)
  4. 4. Dr. Terry ClowerDirectorCenter for Economic Development and ResearchUniversity of North Texas
  5. 5. Overview ofEconomic Impact Analysis Presented By: Terry Clower, Ph.D. University of North Texas October 27, 2011Based on materials prepared by: H. Campbell, T. Clower, G. Hewings, K. Poole, M. White
  6. 6. Topics for Today• Define Economic Impact Analysis• Terminology• Basic Structure of Input-Output Models• Assumptions and Key Considerations Economic Impact Analysis 2
  7. 7. What is Economic Impact Analysis?• Estimating how spending associated with a particular event, project, or industry flows through a regional economy. Economic Impact Analysis 3
  8. 8. What Economic Impact Analysis IS NOT• It is not the same as fiscal impact analysis.• It is not usually a risk-adjusted analysis.• It is not cost-benefit analysis. Economic Impact Analysis 4
  9. 9. Why do we need impact analyses?• Allocate resources among competing projects• Assess the potential for an investment policy – Retaining or expanding an existing business – Attracting new business & economic activity• Putting “hard numbers” on political strategies to test their veracity• Planning for change Economic Impact Analysis 5
  10. 10. Steps in Performing Any Research Project• Identifying stakeholders• Understanding the project & its details• Deciding on scope of the analysis – Geographic – Type of analysis – Timing• Understanding costs and identifying resources Economic Impact Analysis 6
  11. 11. ProductionFunctionProduction Function for aSpiral-bound notebook 7
  12. 12. Input-Output ModelsInput-Output Models add Households• both suppliers of labor inputs to regional industries and purchasers of regional outputs• earnings include: – wages & salaries – proprietors’ income – directors’ fees – employer contributions for healthcare insurance less – personal contributions for social insurance• household column based on PCE Economic Impact Analysis 8
  13. 13. Input-Output Models• Direct effects: – The direct activity(s) of the project in question – Usually defined the direct effects in terms of output or employment. – Most important step in conducting the analysis!!• Indirect effects: – Capture the impacts on firms that (directly and indirectly) supply the activity defined in the direct effect(s). (Type I multiplier)• Induced effects: – Captures impacts of spending by households receiving income based on direct and indirect effects (Type II multiplier) 9
  14. 14. Input-Output ModelsMultipliers are expressed in terms of output, employment and income.• Type I • (direct & indirect effects) measures the economic impact of business interactions - excludes the impact of household expenditures. (“Open” model)• Type II • (direct, indirect, induced) captures the economic impact of business and household expenditures in a linear procedure, which tends to overstate household impacts. (“Closed with respect to households”)• Type III • (Social Accounting Matrix SAM multipliers) A hybrid of Type II multiplier with no set methodology designed to compensate for overestimations of Type IINote: Each industry sector has its own multipliers Economic Impact Analysis 10
  15. 15. Input-Output ModelsInput-Output Assumptions:• Constant returns to scale• Linear and homogenous production functions• Perfectly elastic factor supplies• Constant technology• Note: Some commercial models adjust for these. Economic Impact Analysis
  16. 16. Input-Output Models Other Considerations• Study area definition• Gross vs. Net Impacts – Accounting for leakages/spending realignment• Timing• Adjusting for prices• Defining the direct effect• Margins Economic Impact Analysis
  17. 17. The Functional Economic Area Residential Travel Location of Corridors Labor Force Impact Site Consumer Location of Support Locations Services Location of Supporting Industries Economic Impact Analysis
  18. 18. Input-Output Models Gross vs. Net Impacts: It’s all about the spending and who is doing/receiving the spending.Economic Leakages – When spending leaves the region – Common in trade shows, etc. – In Charlotte, 75 percent of trade show vendors came from other areas • Took their sales home with them • $124M (gross) reduced to $30M (net)Opportunity Costs? Economic Impact Analysis
  19. 19. Input-Output ModelsSpending Realignment & Substitution Effects• The “zero sum” effect: – When spending on one activity (pro sporting events) substitutes for other spending – Can account for as much as 5%-50% direct event spending. – Seattle Mariners: have an impact of $75-$100 Mill., but only $22 Mill. is “new” (Dick Conway) Economic Impact Analysis
  20. 20. Case Study 1: Sporting Events• American Legion World Series – Shelby, NC• 500 hotel rooms• 47 airport pickups• $5 million economic impact Economic Impact Analysis 16
  21. 21. Input-Output ModelsTiming of the Study• a-priori – Projected spending • Realistic?• After the event – Actual spending• Appropriate timing depends on purpose• Comparatively few after the fact studies Economic Impact Analysis
  22. 22. Input-Output ModelsTiming: Impacts by Endurance• Temporary impacts of construction activities – Construction may last several months or several years (for some roads, never ending) – Once construction stops, impacts cease• Recurring Impacts – Operations – Maintenance / repair• Opportunity costs? Economic Impact Analysis 18
  23. 23. Input-Output ModelsPrice Adjustments• I-O models are calibrated to a base year – Rarely corresponds to the impact year – Dollar values must be adjusted to model base year• Sometimes secondary data are “dated” Economic Impact Analysis
  24. 24. Input-Output ModelsDefining the Direct Effect• Most important step• New firm coming to town – Industry already exists in the area: use established multipliers – Industry not in area: may have to build estimates based on firm expenditure patterns • Bill of goods approach • Costly, time consuming, fraught with error, probably can’t get detailed data Economic Impact Analysis
  25. 25. What do you count?• Impacts of a highway include the new distribution center that locates nearby?• Impacts of a new reservoir include the new powerplant that uses the water supply?• Impact of the Golden Gate Bridge include increased tourism? Economic Impact Analysis 21
  26. 26. Case Study 2: Port of Baltimore• “…provides a very comprehensive and extremely broad view of the economic impact of cargo …”• Port activity: 50,200 jobs – 16,500 direct jobs – 14,200 indirect jobs – 19,500 induced jobs• Related activities: 68,300• “Nearly 120,000 jobs linked to the port.” Economic Impact Analysis 22
  27. 27. Case Study 3: Bio-Fuel Plants in Canada• Construction and operations phases – 28 plants plus one R&D facility• Construction – Adjusted for “opportunity costs” – $2.3 billion investment – $2.9 billion impact – 14,177 jobs Economic Impact Analysis 23
  28. 28. Case Study 3: Bio-Fuel Plants in Canada• Operating – Net and Gross – Includes increased oil exports – Includes net present value of 30 years of ops• Gross: – $2.7 billion• Net: displacement of feedstock – $2.0 billion Economic Impact Analysis 24
  29. 29. Impact Issue: More Adjustments?• New Jobs vs. More Hours• Exports• Import substitution – Disaster impacts• Spending realignment• Adjusting output – producer versus purchaser prices Economic Impact Analysis 25
  30. 30. It’s Not Just The Model; It’s Also the User The Biggest Errors in Conducting Impact Analyses Are Often “User Errors” All benefits and no negative consequences Displacement issues (What were residents doing before there was a baseball stadium?) Overstating the net new growth Timing of Impacts Investment Today, Impacts Tomorrow Economic Impact Analysis 26
  31. 31. Un-Measurable Impacts• Impacts that are real and have quantity, but are very difficult to assess. – Value of media exposure – Long term impact on tourism, business attraction (nothing draws a crowd like a lot of people) – Is an event an amenity that enhances the value of nearby properties? Economic Impact Analysis 27
  32. 32. Intangible Impacts• Impacts that are real, but are not practically observable or measurable. – Civic pride – Place bonding – Community cohesiveness – Other? Economic Impact Analysis 28
  33. 33. Legion World Series will be an economic grand slam for Cleveland County. Sunday, Aug 7 2011, 1:17 pm.National media coverage from ESPN3 will showcase the American Legiongames but will also “paint a picture of what our community’s really like,”…that estimate, however, is only for the time when the World Series is intown. …. it’s possible baseball fans will return to Shelby in the comingmonths and years, if not for a World Series, then for the charm of ClevelandCounty. 500 volunteers“The way that our entire community has pulled together, worked together,volunteered, raised money to bring it here —that’ s been a tremendouslyunifying force,” Alexander said. Economic Impact Analysis 29
  34. 34. Conclusions• Economic impact analysis is a valuable tool – when properly done.• State clearly or understand the parameters and limitations.• Best analysis does not always result in the biggest number.• If conducting or commissioning an impact study, manage stakeholder expectations. Economic Impact Analysis 30
  35. 35. Questions? Terry L. Clower, Ph.D. Center for Economic Development & Research University of North Texas for Community & Economic Research (C2ER) Economic Impact Analysis 31
  36. 36. Links• Economic Impact Model for Arts and Heritage. Online tool.• Ontario tourism impact model• Doyletech• Nova Scotia Tourism impact model• Yukon Economic Impact Calculator• Statistics Canada model order form Economic Impact Analysis 32
  37. 37. Q&APlease send your questions via the Chat orQuestion widget on your dashboard.
  38. 38. Stay in TouchThank you for joining us! Celine Favreau Project Managr, SEDA @saskecdevassoc @growourregion Dr. Terry L. Clower Director, Center for Economic Development and Research University of North Texas