Background

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1. An Economic Impact Assessment (EIA) examines the effect of an economic event or activity on the economy in a specified area.

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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.

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3. These impacts can be grouped in three major categories, equally important to an EIA:

• Direct effects: The contribution of the analysed company, investment project, or sector to the economy, that comes straight from its activity.
• Indirect effects: The contributions to the economy resulting from the impact of the subject’s activities on the activities of firms or sectors related to them. These effects are measured all along the subject’s supply chain, and possibly on other activities in the relevant area.
• Induced effects: These are the contributions that arise from the subject’s activity but are not related to it. An example would be the increase in revenue of local grocery stores due to increased consumption from the people employed by the subject, after they begin receiving their salaries.

Multipliers and input-output models

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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.

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5. Some well-known examples of economic multipliers are:

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a) The Keynesian multiplier

• 1 / (1 − MPC), where MPC is the Marginal Propensity to Consume.
• It is a theoretical multiplier, derived from the expenditure approach formula for GDP calculation and the consumption function: C = MPC × Y

• It measures the impact on GDP of variations in private investments, I, or government expenditures, G.

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b) The bank multiplier

• Also known as the “Deposit multiplier” or “Money multiplier”.
• This multiplier shows the amount of money the banking system can create for every deposit and is determined by the Reserve Requirement, RR, that the local central bank has in place.
• The RR is the percentage of every deposit that the banks are required to keep with the central bank, and therefore cannot lend to clients.
• The bank multiplier is calculated as: 1 / RR

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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.

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7. In practise, we develop industry specific and economy specific multipliers for each analysis, usually with the use of an input-output model.

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8. The multipliers can then be used to calculate the total, direct, indirect and induced, impact of the subject in the economy.

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9. There exist two general types of multipliers:

• Type I: Supplier linkage effects or Type I multipliers only cover direct and indirect effects. They estimate the impact on the supply chain resulting from a producer increasing their output to meet additional demand. When doing so, this producer in turn increases the goods and/or services they purchase from their suppliers. These suppliers also increase their demands for goods and services from their own suppliers, and so on down the supply chain. Type I multipliers underestimate the effect on the economy as they do not estimate induced effects.

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• Type II: Type II multipliers not only account for the direct and indirect impacts, but they also account for induced impacts based on the local purchases made by employees. The ratio of the sum of direct, indirect, and induced effects to direct effects is the Type II multiplier.

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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.

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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.

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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.

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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.

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14. Using this region and industry-specific IO models, we calculate the multipliers:

• Type I: ratio of the sum of direct and indirect output over direct output.
• Type II: ratio of the sum of direct, indirect, and induced output over direct output.

Scottish case study: input-output tables

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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.

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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.

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17. Here is an example of a derived input-output table from the Scottish government in 2018:

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18. This can be split into 3 main sections.

1. The intermediate use: shows the inputs of products, both domestic and imported, used by Scottish industries in the production of their output.
2. The final use: shows the purchases of each product by each category of final use, e.g. consumers, government, exports.
3. The primary inputs: these inputs do not flow through the other industries, they are employees' salaries, taxes less subsidies on production and gross operating surplus, which together constitute Gross Value Added. The Combined Use matrix is repeated at full 98-industry in Scotland.

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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:

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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

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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.

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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.

Methodology

21. For the Direct Economic impact, calculate different outputs:

• Revenue generated by the project.
• Gross Value Added, direct contribution to GDP.
• Number of jobs created, and salaries and wages given.

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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.

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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:

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Table 1. RIMS II Final-Demand Multipliers

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Further analysis

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24. To deal with the limitations of EIA, conduct an analysis of the construction and time cost of the project.

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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.

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26. Calculate the net impact of the project or company by subtracting deadweight loss from the total impacts calculated above.

Irish case study: EIA for software company (Lero) using I-O analysis

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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.

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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.

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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):

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          (1) L = (I – A)⁻¹

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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.

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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:

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(2) (Omul)j = ∑ Lij

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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.

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33. Using these multipliers, the following results were obtained for EIA:

UAE case study: multiplier effect for Emirates Global Aluminium

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34. While figures for economic multipliers in the UAE are not as readily available, Emirates Global Aluminium (EGA) provides a good alternative in its economic impact report.

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35. The paper highlights that EGA contributes significantly to the UAE economy, highlighting that economic impact has been a key factor in measuring the company’s success in the report.

• EGA is the largest industrial company in the United Arab Emirates outside the oil and gas sector and was the world’s largest producer of ‘premium aluminium’ in 2017. It operates aluminium smelters in Abu Dhabi and Dubai and sells its products to more than 350 customers in over 60 countries.
• This report examines the contribution that both EGA, and the wider aluminium sector, make to the UAE economy. In 2017, the aluminium sector is estimated to have generated a US $5.47 billion / AED 20.09 billion total contribution to the UAE economy––equivalent to 1.4 percent of total national GDP, or 1.8 percent of its non-oil economy.
• This total includes economic activity the aluminium sector stimulates through its expenditure with local suppliers, indirect effect, and by the payment of wages to staff, which are then spent in the UAE’s consumer economy, (induced effect)

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36. In general, it estimates that for every US $1 of GDP generated by the aluminium sector itself, a further US $1.26 of activity is supported elsewhere in the UAE economy.

• In 2017, the aluminium sector supported 60,950 jobs across the UAE. This is equivalent to 1.0 percent of all national jobs. It calculated that for every individual working in the sector itself, a further five workers are supported in other parts of the UAE economy, due to the industry’s expenditure with local suppliers and payment of wages which are then spent in the local consumer economy.
• Looking at EGA itself, GDP per job is extremely high by national and globalstandards, at almost US $320,000 (around AED 1.17 million) in 2017. Thisreflects the capital-intensive nature of the firm’s operations, use of advancedtechnology, strong workforce skills, and the high values achieved by itsproducts in the global marketplace.
• Over 15 percent of the company’s own workforce are Emirati nationals,which is far higher than the national average.

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37. Economic impact is analysed through economic footprint, following the model in thefigure below, extracted from their report:

Figure 1. A standard economic impact assessment model

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38. The sector’s direct contribution to GDP, which includes employment costs, capitalcosts, and net operating profits, while excluding the cost of these inputs, amounted toUS $2.42 billion (AED 8.88 billion). EGA itself accounted for US $2.31 billion (AED 8.47billion) of this, and its UAE-based customers accounted for US $0.11 billion (AED 0.41billion), as shown in the figure below

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Figure 2. The direct GDP and jobs impacts of the UAE aluminium sector

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39. Indirect impact comes from the spending which stimulates GDP in the UAE-basedsupply chain. This is referred to as the aluminium sector’s “indirect” GDP.

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40. As the figure below illustrates, purchases by the aluminium sector, other thanimported supplies, provide revenues to the direct suppliers to the sector, i.e. the “firstround” of the supply chain.

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Figure 3. The aluminium sector’s UAE-sourced supplies, by industry

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41. These are used to fund staff costs, capital costs, and purchases of inputs from further“rounds” of suppliers, with any amount left over constituting these suppliers’ profits.The GDP of these direct suppliers to the aluminium sector is the sum of their staffcosts, capital costs, and profits. This can be visualized in the following diagram:

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Figure 4. The GDP of each “round” of suppliers for the aluminium sector

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42. These lead to indirect spending to the tune of the following amounts:

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Figure 5. Indirect GDP impact by sector of supplier

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43. Which funds further investment via induced GDP:

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Figure 6. Induced GDP impact by sector of supplier

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44. If the EGA didn’t represent virtually the entirety of the aluminium sector in the UAE, a further analysis could account for all the impacts that the aluminium sector would have in the local economy if the EGA was not a player. This would pass by evaluating how much of its production could be absorbed by their competitors.

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45. This additional analysis would provide a view of the net contribution of the company to the local economy, giving out a more realistic outlook of its importance locally.