An “economic impact” basically means an increase in income to someone and/or a job created for someone. So, for example, how much personal income does the tourism industry add to La Plata County? How many jobs are created due to the productivity of the tourist industry?
Economic impacts typically are divided into three categories: direct, indirect and induced.
Direct economic impacts consist of the jobs and income created by the primary producers in an industry. The primary producers generate income and create jobs for their employees by producing a product whereby the value of the output generated is greater than the value of the resources used in the production process. This increase in value allows companies to pay their employees, thereby generating jobs and income.
Indirect impacts consist of the additional jobs and income created when the primary producing companies purchase goods and services from the many diverse businesses that provide support to the primary producers and taxes to governments. The indirect impacts include both an increase in income and/or jobs for these businesses or government entities, and the additional income and jobs created when employees and owners of the support businesses and government entities spend their additional income throughout the local economy.
Induced impacts consist of additional income and jobs created throughout the economy when the employees of the primary producers spend their personal incomes on consumer goods, other property, services and taxes.
Other Economic Concepts Used to Describe Impacts
Economists typically estimate indirect and induced impacts by using a “multiplier.” Multipliers are used to represent the “ripple effects” of money in the economy as it is traded and traded again, generating wealth and income. For example, a multiplier of 1.5 would mean that for every dollar of payroll that an industry pays to its own employees, an estimated $0.50 in additional economic value or income is generated in other industries. It is important to remember that multipliers are estimates of the ripple effect. Economists do not always agree on what the multiplier for a specific industry or type of business should be.
The Bureau of Economic Analysis (BEA), by using a Regional Input-Output Modeling System (RIMS), has determined industry multipliers for specific regions in the country. Each industry is assigned a different multiplier based on several factors, including the residency of the workforce, the average wages paid, and the “maturity” of the economic sector. For example, a mature support sector (typical of large cities) will stimulate more spending locally and less “leakage” of dollars outside the region. Conversely, an underdeveloped (immature) support sector (typical of smaller communities) will hold dollars locally for a shorter period as residents look outside the immediate community to make many of their purchases.
Steps in the Analysis:
1) Identify the producers in the industry.
2) Develop a survey to give to these producers.
a. The survey should ask how much spending the producers do in the area being investigated (La Plata County, for example), how many employees they have in the area, what is their payroll (minus benefit payments that go outside of the area). If tax information is not available from the city/county, then the survey should ask about taxes paid as well. See me for examples of both a survey to producers (organizations) and to event participants (see 3 below).
3) If the study involves an "event" that happens once per year, for example, then another survey needs to be developed that will be distributed to the event participants to find out how much they are spending at the event (thereby contributing income to the local economy).
4) Once the data is collected, then the analysis is conducted, using the multipliers.