An economic impact study is a quantitative and qualitative analysis showcasing the economic influence an industry, business, organization, policy, program, project, activity, or other economic event makes to the national account of a region or a country. The study highlights direct, indirect and induced impacts on national GDP, value chains, employment opportunities and employees spending patterns. The analysis is usually conducted to assess the feasibility of an investment and to forecast its benefits on the economy.
Exhibit 1: Economic Impact Analysis Framework
An Input-output analysis is an economic examination based on assessing interdependencies between economic sectors. It is used for estimating the economic impacts and ripple effects of events and public investments or programs. It can be divided into three steps:
An input-output table represents the monetary flow of final and intermediate goods and services consumed between different sectors within an economy. The table illustrates the relationship between producers and consumers, and interdependencies of economic sectors for a given year.
In order to calculate different economic multipliers to estimate indirect and induced impacts, a Leontief Inverse Matrix is derived from the previously calculated input-output table coefficients.
An intermediate matrix (A) is built using technical coefficients of the input-output table. It can be configured to account for indirect economic impact by including interactions between economic sectors. Moreover, it can be configured to account for induced impact by including interactions between economic sectors, compensation for employees and households’ consumption.
Once matrix (A) has been built, the Leontief inverse matrix (L) can be calculated using the following formula:
Where (I) is an nxn
Economic Multipliers (EM) estimate the effects of economic changes and derive from values in the Leontief inverse matrix. EM can be used to study the indirect impact which rises from additional value-added to other business services sectors or induced impact arising from additional household expenditures of newly employed individuals.
There are several economic multipliers than can be derived from the Leontief Inverse Matrix.
Output Multiplier (OM)
The Output Multiplier estimates additional outputs produced in the economy due to a unit increase in the studied sector. OM is calculated as the column sum for each economic sector.
Income Multiplier (IM)
The income multiplier shows increase in compensation of employees (C) resulting from increased value added in each sector.
Income Effects (IE)
The income effect multiplier measures effects on household consumption due to change in production and additional income in the studied industry.
The direct economic impact measures the incremental value added of an activity to the national GDP. It is measured as the product of the gross output and the incremental contribution of the economic sector to total GDP.
Indirect Economic Impact
The indirect economic impact measures the changes in sales, income or jobs in sectors within the region that supplies goods and services to the analyzed economic sector. It’s measured as the product of the direct economic impact and an effect multiplier.
Induced Economic Impact
The Induced economic impact measures the increased sales within the region from household spending of the income earned in the studied and supporting sectors such as housing, utilities, groceries, etc. It is measured as the product of the direct economic impact and an induction factor.
Impact on Employment
The economic impact will generate additional employment opportunities through direct, indirect and induced contributions to GDP. The generated employment opportunities can be calculated by dividing the total economic impact on GDP by national GDP per employee.
In addition, the economic impact analysis should include qualitative aspects. The analysis must underline macroeconomic externalities such as financial stability and employment facilitation. In addition, it should highlight alignment with national strategies and visions. On a social level, it should showcase effects that would be recognized by citizens and increased awareness over the analyzed matter.