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An Economic Impact Assessment (EIA) measures the effect of an economic event or activity on the economy of a specified area. The subject can be a company, an investment project or a whole sector. This is the economic EIA, not the environmental impact assessment that shares the acronym: the economic kind deals in output, incomes and jobs rather than habitats and emissions.
The impacts are usually measured in monetary values, such as total output, GDP, Gross Value Added (a project’s direct contribution to GDP) and total household earnings, or in real-world outcomes, most commonly the change in the number of jobs. Whichever measures are chosen, the purpose is the same: to capture in full what an activity contributes to the economy around it, not only what appears in its own accounts.
That wider contribution falls into three categories: direct, indirect and induced effects, which the next section takes in turn. (Then delete the now-redundant list that followed the original sentence, if one did; keep whichever wording avoids naming the categories twice.): direct, indirect and induced effects, which the next section takes in turn. The method is practical rather than theoretical: this guide works through three applications at three different scales, a single research centre in Ireland assessed over thirteen years, an entire industrial sector in the United Arab Emirates assessed by Oxford Economics, and the official input-output tables published by the Scottish Government, which are the foundation such assessments are built on.
Direct effects are the contribution that comes straight from the subject’s own activity: its output, the people it employs, the value it adds. Indirect effects are the contributions that result from the subject’s impact on the firms and sectors related to it, measured all along its supply chain. Induced effects arise from the subject’s activity without passing through its operations or supply chain: the classic example is the increase in revenue of local grocery stores once the people employed by the subject begin receiving and spending their salaries.
The three layers matter because each answers a different question. Direct effects show what the project is; indirect effects show what it buys; induced effects show what its wages do in the local economy. A complete assessment counts all three.
An economic multiplier is a ratio that shows the total effect on the economy of one extra unit of activity, for example one extra pound of spending or investment. Two textbook examples illustrate the idea. The Keynesian multiplier, 1 / (1 − MPC), where MPC is the marginal propensity to consume, the share of each extra unit of income that people spend rather than save, measures the impact on GDP of changes in private investment or government spending. The bank multiplier, also called the deposit or money multiplier, is 1 / RR, where RR is the reserve requirement, the share of every deposit that banks must keep at the central bank rather than lend out. It shows how much money the banking system can create from each deposit.
Both are theoretical: the simplifying assumptions behind them mean they cannot be applied directly in a real analysis. Their principles carry over, though, and practical assessments build industry-specific and economy-specific multipliers instead, usually from an input-output model.
Type I multipliers cover direct and indirect effects only; Type II multipliers add induced effects as well. A Type I multiplier estimates the ripple down the supply chain: a producer increases output to meet new demand, buys more from its suppliers, who buy more from theirs, and so on. Because it stops there, a Type I multiplier underestimates the effect on the economy. A Type II multiplier also counts the local spending of employees’ wages, and is calculated as the ratio of direct, indirect and induced effects together to direct effects alone. For a complete picture of a project’s impact, this guide recommends Type II.
An input-output (IO) model is a detailed map of an economy, built from data, showing how every sector buys from and sells to every other, so that the output of one sector becomes an input to another. In the model’s central table, the inter-industry matrix, columns show what a sector buys and rows show what it sells, revealing how dependent each sector is on all the rest.
Figure 1: The hypothetical transactions table from the source article, reproduced in its original format with all its values, six industries, final demand and the payments rows.
National statistics offices publish the raw material. In Scotland, the input-output analytical tables are derived from Supply and Use tables, which record what each industry produces and consumes; these are adjusted to remove imports, taxes, subsidies and traders’ margins, then rearranged into industry-by-industry form. The result splits into three parts: intermediate use (what industries buy from each other), final use (purchases by consumers, government and exports), and primary inputs: the salaries, taxes less subsidies, and business profits (operating surplus) that together make up Gross Value Added.
Figure 2: The Scottish Government’s 2018 industry-by-industry input-output analytical table, reproduced in its original format with all its values, intermediate use, final use and the primary-input rows.
From these tables the multipliers are calculated with a standard piece of matrix arithmetic called the Leontief inverse, written L = (I − A)⁻¹. In plain terms, it answers one question: to deliver one unit of output from a given industry, how much output is needed, directly and indirectly, from every industry in the economy? For Type II, households are treated as one more industry, with a row added for wages received and a column for household spending, so the induced effect enters the same calculation.
Three steps, then an honesty check. First, measure the direct impact: the revenue the project generates, its Gross Value Added, and the jobs, salaries and wages it provides. Second, find the multiplier for the project’s industry and economy, either calculated from the input-output table or published by the national statistical agency, as the Bureau of Economic Analysis does in the United States; use Type II so induced effects are included. Third, apply the multiplier to the direct figures to estimate the total impact on GDP, Gross Value Added, household earnings or jobs.
Table 1: RIMS II final-demand multipliers, the four standard multipliers and how each turns a change in final demand into a total impact.
Source: Scottish Government Input-Output Methodology Guide, as attributed in the source report.
The honesty check is deadweight, the impact that would have happened anyway. Work out what would have occurred without the project, and subtract it, so that impacts which would have occurred anyway are not claimed. The net impact, total impact less deadweight, is the number a credible assessment reports, alongside an analysis of the project’s construction and time costs.
Ireland: a research centre. The software research centre Lero provided thirteen years of its internal records, allowing it to be separated out as its own row and column in the Central Statistics Office’s input-output table for Ireland, with the 2011 table used to stand in for each year, a standard workaround since most statistical agencies do not publish these tables annually. With overheads assumed at 30 percent of direct costs and Type II output multipliers ranging from 4.38 to 5.45, the Lero study found that €98.69 million of income over 2005 to 2018 translated to a total contribution of €515.32 million to the Irish economy, as the table below shows year by year.
Table 2: Lero’s income and its total contribution to the Irish economy, year by year from 2005 to 2018, calculated with Type II output multipliers.
Figure 3: A standard economic impact assessment model: direct, indirect and induced channels adding up to total impact.
Source: Emirates Global Aluminium economic impact report (2018).
The UAE: an industrial sector. Where official multipliers are not readily available, a credible corporate study can stand in. Oxford Economics’ report for Emirates Global Aluminium estimated that in 2017 the UAE aluminium sector contributed US $5.47 billion (AED 20.09 billion) to the national economy, 1.4 percent of GDP and 1.8 percent of the non-oil economy, supporting 60,950 jobs, 1 percent of national employment. For every US $1 of GDP the sector generated itself, a further US $1.26 of activity was supported elsewhere in the economy, and for every person the sector employed, a further five jobs were supported beyond it. The sector’s direct contribution to GDP was US $2.42 billion, of which Emirates Global Aluminium itself accounted for US $2.31 billion, as the chart below shows.
Figure 4: The direct GDP and jobs impacts of the UAE aluminium sector, split between Emirates Global Aluminium and its UAE-based customers.
Behind the direct figures sits the supply chain. The sector’s purchases from UAE-based suppliers totalled US $3.13 billion, led by natural resources and utilities and by manufacturing.
Figure 5: The aluminium sector’s UAE-sourced supplies, by industry, totalling US $3.13 billion.
Those revenues fund each round of suppliers in turn: their staff costs, capital costs and profits add up to the sector’s indirect GDP.
Figure 6: How the GDP of each round of suppliers builds the sector’s indirect GDP.
Source: Emirates Global Aluminium economic impact report (2018).
The indirect contribution came to US $2.95 billion, and the induced contribution, from wages spent in the consumer economy, added a further US $0.46 billion.
Figure 7: Indirect GDP impact by sector of supplier, totalling US $2.95 billion.
Figure 8: Induced GDP impact by sector, totalling US $0.46 billion (the source report’s Figure 6). Interactive on the live page: hover any slice of the donut; all eleven values are as printed in the source chart.
Source: Emirates Global Aluminium economic impact report (2018).
The study also illustrates the final refinement: because Emirates Global Aluminium represents virtually the entire UAE aluminium sector, no deduction was needed for business that rivals would have picked up, but where a company has competitors, a net assessment would estimate how much of its production they would absorb in its absence.
That the difference between a credible Economic Impact Assessment and a promotional one is method, not size. A credible assessment counts all three layers of effect, uses Type II multipliers built from the right data for the right economy, attributes third-party findings to their sources, and nets off deadweight before claiming a number. MCC builds multipliers tailored to the specific industry and economy for each analysis it undertakes, and the full technical article below sets out the machinery in detail.
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