Discover the comprehensive insights provided by Economic Impact Assessments (EIA). This article delves into how EIAs measure the effects of economic activities on specified areas, highlighting direct, indirect, and induced impacts. Learn about economic multipliers, input-output models, and case studies from Scotland, Ireland, and the UAE to understand the broader economic implications of investments and projects.
Economic Impact Assessments (EIA) are vital tools for understanding the comprehensive effects of economic activities on specified regions. This article explores how EIAs quantify impacts in monetary terms, such as GDP, Gross Value Added, and employment opportunities, categorized into direct, indirect, and induced effects. It explains the role of economic multipliers, like the Keynesian and bank multipliers, and their practical applications through input-output models. Readers will gain insights into the methodologies behind EIA, including the development of industry-specific multipliers and their use in calculating total economic impacts. The article features detailed case studies from Scotland, Ireland, and the UAE, demonstrating the real-world application of EIAs. Through these examples, the article illustrates how EIAs help businesses and governments make informed decisions by revealing the ripple effects of investments and projects on local economies. Explore this article to understand the foundational principles and practical benefits of Economic Impact Assessments.
1. An Economic Impact Assessment (EIA) examines the effect of an economic event or activity on the economy in a specified area.
2. The impacts are usually measured in monetary values, such as total output, GDP, Gross Value added and total household earnings, or in material outcomes, for example the variation of the number of employment opportunities.
3. These impacts can be grouped in three major categories, equally important to an EIA:
4. Economic multipliers are mathematical expressions that indicate the total economic impact of a unit variation in the underlying factor. They are typically represented as a ratio.
5. Some well-known examples of economic multipliers are:
6. Although these multipliers are theoretical and can hardly be applied in a real-world analysis, due to several simplifying assumptions that they require, their principles are still applicable and can be used as a base for the development of practical multipliers.
7. In practise, we develop industry specific and economy specific multipliers for each analysis, usually with the use of an input-output model.
8. The multipliers can then be used to calculate the total, direct, indirect and induced, impact of the subject in the economy.
9. There exist two general types of multipliers:
10. The foundation of an Economic Impact Assessment is a model of the study area’s total economy, detailing flows of resources through different industry sectors and other areas of consumption and production.
11. EIA regularly employs input-output, IO, models to evaluate the economic impact of a project or investment. An IO model is a quantitative economic model that represents the interdependencies between different sectors of a national economy or different regional economies.
12. An IO model depicts inter-industry relationships within an economy, showing how the output from one sector may become an input to another sector. In the inter-industry matrix, column entries typically represent inputs to a sector, while row entries represent their outputs.
13. This format, therefore, shows how dependent each sector is on every other sector, both as a consumer of their outputs and as a supplier of inputs.
14. Using this region and industry-specific IO models, we calculate the multipliers:
15. The input-output analytical tables (IOATs) are derived from the Supply and Use tables. The Supply and Use (SU) tables are extended to split output into the market sector, the government sector and the non-profit institutions serving households (NPISH) sector. These tables are then converted into basic prices by removing imports, taxes and subsidies on products, and distributor trading margins. They are then transformed into product-by-product tables.
16. The Scottish government’s industry by industry analytical tables are generated from the Supply and Use tables under a Fixed Product Sales Structure (FPSS) assumption – that the sales structure for a given product is the same regardless of which industry it is produced by. This means that secondary production of a given product is sold to other industries and final use in the same proportions as production of that product by its principal producing industry.
17. Here is an example of a derived input-output table from the Scottish government in 2018:
18. This can be split into 3 main sections.
19. The Leontief inverse matrices, multipliers, are derived from the industry-by-industry matrix and show how much of each industry’s output is needed, in terms of direct, indirect and, in Type II matrices, induced requirements, to produce one unit of a given industry’s output. The formula for the Type I Leontief is as follows:
L = (I − A)⁻¹
Where:
L = Leontief Inverse matrix
I = Identity matrix
A = Direct requirements matrix – each cell of the lxl matrix divided by its column total
20. The Type II Leontief is calculated in the same way as the Type I above but, as its purpose is also to estimate the flows of money in and out of households and the effect of these transactions upon industries, i.e. the induced effect, it is necessary to endogenize the household sector. Put simply, we treat households as an additional industry by adding an extra row and column into the direct requirements table for ‘compensation of employees’ and ‘household expenditure’ coefficients respectively.
The formal notation for this “direct requirements” table is:
A = [ AII AIH ]
** [ AHI AHH ]**
Where:
AII[i,j] = amount of industry i required per unit of industry j; this is identical to the A matrix used in the calculation of the Type I Leontief above.
AIH[i,j] = amount of industry i required per unit of total household income from all sources.
AHI[i,j] = income paid to households per unit of output of industry i.
AHH[i,j] = household expenditure per unit of exogenous household income, usually set to 0.
21. For the Direct Economic impact, calculate different outputs:
22. Identify the type of industry and economy sector and calculate the specific multiplier by using the IO table. In some cases, each industry’s multiplier may be available on the country’s statistical agency website, such as the BEA in the United States. It is suggested to use Type II to incorporate the induced impact on the economy in the analysis.
23. Using these multipliers, calculate the total impact on GDP, Gross Value Added generated, household earnings, or total jobs created in response to the company’s activity. The table below provides a general example of these calculations:
Table 1. RIMS II Final-Demand Multipliers
24. To deal with the limitations of EIA, conduct an analysis of the construction and time cost of the project.
25. Calculate the deadweight loss by analysing what would happen without the intervention in question, distinguishing the impacts that are caused by the subject from those that would occur anyway, deadweight.
26. Calculate the net impact of the project or company by subtracting deadweight loss from the total impacts calculated above.
27. To facilitate an economic impact assessment, Lero provided access to 13 years of administrative data which facilitates the creation of a new row and column in the CSO’s input-output table for Ireland, thus disaggregating Lero from the Education Services sector. However, the CSO does not publish input-output tables annually. Therefore, the report takes the 2011 input-output table for Ireland and uses it as a proxy for each of the 13 years. Most national statistical agencies do not publish input-output tables annually and this has necessitated an input-output table for one year being used as a proxy for multiple years as is also commonly applied in similar studies.
28. Income data from Lero mainly consisted of direct costs for each grant awarded to Lero from 2005 to 2018. However, data on overheads was not available from Lero. This is because overheads are managed by each of the Lero HEIs, instead of directly by Lero. To account for this, the percentage rate for overheads for each funding agency and the number of grants awarded by each funding agency across the years of the study were calculated. The average overhead rate was calculated at 30% of total direct costs. Therefore, based on this calculation, this report assumes a 30% overhead rate for Lero. The total amount derived from this percentage was added to the figure for total direct income for each year.
29. The output multiplier refers to the change in total output for the entire economy resulting from a unit change in final demand, Hermannsson et al. 2015. The first necessary step in calculating the Type II output multiplier is to estimate the following model, shown in Equation (1):
(1) L = (I – A)⁻¹
30. To obtain these matrices, this report first started with the CSO’s 2011 input-output table for Ireland, CSO 2014. Lero was then disaggregated from the Education Services sector.sector by calculating the percentage of total output that is spent on each sector, in a new column, and then multiplying by the total income amount derived from their data. The next step was to create a new row for Lero where all sources of income were introduced. Almost all their income is derived from national government sources and the EU. Therefore, each cell in the input-output table for the Lero row contains a zero in the intersection with other sectors, while most of their income was recorded in the cell specified for government sources.
31. Obtaining Type II multipliers involved adding a new column for total household consumption and a new row for total compensation of employees to the matrix. This enabled accounting for the induced effect derived from household consumption. Thus, the final matrix consisted of 60 sectors, i.e. the original 58 sectors as defined by the CSO, one sector that was added to disaggregate Lero from the Education Services sector, and one final sector for household consumption. Finally, the Type II multipliers for each sector are obtained by adding all the coefficients for each sector, i.e. the columns’ total of the inversed matrix, as follows:
(2) (Omul)j = ∑ Lij
32. In Equation (2), O is the output multiplier which is equal to the column total of the Type II multipliers for each sector, denoted by the letter L, i.e. the Leontief inverse matrix.
33. Using these multipliers, the following results were obtained for EIA:
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