Economic impact analysis

Economic impact analysis is a methodology for measuring or estimating how a specific business, organization, policy, program, project, or event affects economic activity within a defined geographic region^[1]. The approach quantifies direct, indirect, and induced effects to provide stakeholders with comprehensive understanding of economic consequences. Study regions may range from neighborhoods to entire nations or the global economy.

The theoretical foundations trace to Wassily Leontief, who developed input-output analysis in the late 1920s. Leontief received the Nobel Prize in Economics in 1973 for this work. His matrices representing inter-industry relationships enabled systematic analysis of how changes in one sector ripple through the broader economy.

Types of economic impacts

Economic impact analyses distinguish three categories of effects that together comprise total impact.

Direct impacts represent the initial economic activity under study. These include jobs created, wages paid, and purchases made by the entity being analyzed. A new manufacturing plant hiring 500 workers and purchasing $50 million in equipment generates direct impacts through those specific transactions.

Indirect impacts occur when businesses serving the analyzed entity spend money within the local economy. The manufacturing plant purchases components from local suppliers. Those suppliers pay their employees and buy from their own vendors. Each transaction creates additional economic activity attributable to the original investment.

Induced impacts arise when employees of the direct entity and its suppliers spend their earnings locally. Workers buy groceries, pay rent, and dine at restaurants. These consumer expenditures support jobs in retail, housing, and hospitality sectors. The cycle continues as those service sector employees spend their wages^[2].

Methodological approaches

Two primary methods dominate economic impact analysis practice.

Input-output models represent the most widely used approach. These models rely on tables showing inter-industry transactions within a regional economy. Leontief's original formulation used matrix algebra to trace how output changes in one industry affect inputs required from all other industries.

The Bureau of Economic Analysis publishes national input-output tables for the United States. Regional models adapt these tables to reflect local economic structures. IMPLAN (Impact Analysis for Planning), developed originally by the U.S. Forest Service in the 1970s, has become the dominant commercial platform for regional analysis. RIMS II (Regional Input-Output Modeling System) offers an alternative from the Bureau of Economic Analysis.

Input-output models produce multipliers indicating total economic impact per dollar of direct spending. A multiplier of 2.5 means each dollar of direct spending generates $2.50 in total regional economic activity. Multipliers vary by industry, region, and economic conditions.

Computable general equilibrium (CGE) models offer more sophisticated analysis. These models incorporate supply constraints, price adjustments, and behavioral responses absent from basic input-output approaches. REMI PI+ represents a prominent CGE platform used for policy analysis. CGE models better capture long-term effects and second-order consequences but require greater expertise and resources to implement.

Econometric models use statistical relationships between variables to forecast impacts. These approaches are particularly useful when analyzing policies or events without direct historical precedent. Microsimulation extends econometric methods to model individual-level behaviors aggregated to population estimates^[3].

Key metrics and outputs

Economic impact studies typically report several standard metrics.

Employment measured in job-years or full-time equivalent positions indicates labor market effects. Direct jobs are easiest to count. Indirect and induced employment requires modeling. Studies should distinguish temporary construction employment from permanent operational positions.

Labor income captures wages, salaries, and benefits paid to workers. This metric matters more than job counts when evaluating economic welfare. A project creating 100 high-wage positions generates more beneficial impact than one creating 200 minimum-wage jobs.

Output or gross regional product measures total value of goods and services produced. This corresponds roughly to regional GDP. Output represents the most comprehensive impact measure but can double-count intermediate transactions if interpreted carelessly.

Tax revenue estimates help governments assess fiscal implications. Sales taxes, property taxes, and income taxes all respond to economic activity changes. Infrastructure projects may generate enough tax revenue to justify public investment.

Applications

Economic impact analysis serves diverse purposes across public and private sectors.

Policy evaluation uses impact analysis to assess proposed regulations, tax changes, or spending programs. Environmental regulations impose compliance costs while potentially creating green jobs. Tax incentives for businesses must generate sufficient indirect benefits to justify forgone revenue.

Project justification supports funding requests for infrastructure, sports facilities, and cultural institutions. Proponents of new stadiums routinely commission impact studies demonstrating economic benefits. Critics note that independent analyses often produce lower estimates than developer-sponsored research.

Grant applications require impact analysis for many federal and state programs. The U.S. Department of Commerce Economic Development Administration evaluates project proposals partly on projected job creation. Rural communities use impact studies to demonstrate need for healthcare facilities^[4].

Disaster assessment quantifies economic losses from hurricanes, floods, earthquakes, and other events. FEMA and state emergency management agencies use impact analysis to determine aid allocations. Insurance companies employ similar methods for claims processing.

Business planning incorporates impact analysis when evaluating expansion decisions. Companies assess how new facilities will affect local economies and, consequently, their own operating environments. Corporate social responsibility reporting may include economic impact disclosures.

Best practices and limitations

Credible economic impact analysis requires adherence to established standards.

Assumptions transparency is essential. Studies should clearly state all assumptions about employment levels, wage rates, and spending patterns. Readers should be able to evaluate whether assumptions are reasonable and understand how different assumptions would change results.

Appropriate multipliers must be selected carefully. Using outdated multipliers or ones derived for different regions produces misleading estimates. National multipliers generally overstate impacts for small regions. Studies should use current, region-specific multipliers whenever available.

Conservative estimates build credibility. Overstating impacts damages the analyst's reputation and can lead to poor decisions. Presenting ranges rather than point estimates acknowledges inherent uncertainty.

Displacement effects require consideration. New businesses may capture market share from existing firms rather than expanding total economic activity. A new grocery store may simply redistribute spending from established competitors.

Opportunity costs are often ignored but should be acknowledged. Resources devoted to one project become unavailable for alternatives. Public funds subsidizing a stadium could instead support education or healthcare with potentially higher returns^[5].

Historical development

Economic impact analysis evolved through several phases.

Leontief's original 1936 article in Review of Economics and Statistics presented the theoretical framework. His analysis of the American economy required months of manual calculation. The 1949 computation using Harvard's Mark II computer represented an early application of electronic computing to economics.

World War II applications demonstrated practical utility. Planners used input-output analysis to predict how converting from military to civilian production would affect employment across industries. Post-war reconstruction planning in Europe employed similar methods.

Regional economic modeling expanded during the 1960s and 1970s. Walter Isard's work at the University of Pennsylvania established regional science as a distinct field. The U.S. Department of Commerce developed RIMS to support planning for federal programs.

Personal computers democratized impact analysis in the 1980s. IMPLAN's evolution from mainframe to desktop software made sophisticated analysis accessible to local governments and smaller consulting firms. The proliferation of studies, however, raised quality concerns as less experienced practitioners entered the field.

Infobox5 — recommended articles

Cost-benefit analysis Regional economics Economic development Policy analysis Input-output analysis Econometrics Public policy Project evaluation

References

• Leontief, W. (1986). Input-Output Economics, 2nd edition, Oxford University Press
• Miller, R.E. and Blair, P.D. (2009). Input-Output Analysis: Foundations and Extensions, 2nd edition, Cambridge University Press
• Pleeter, S. (ed.) (1980). Economic Impact Analysis: Methodology and Applications, Springer
• U.S. Bureau of Economic Analysis. RIMS II: An Essential Tool for Regional Developers and Planners

Footnotes

<references> <ref name="p1">Wikipedia (2024). Economic impact analysis</ref> <ref name="p2">IMPLAN (2024). An Introduction to Economic Impact Analysis</ref> <ref name="p3">Springer (1980). Methodologies of Economic Impact Analysis: An Overview</ref> <ref name="p4">Rural Health Information Hub (2024). About the Economic Impact Analysis Tool</ref> <ref name="p5">Inform Economics (2024). Economic Impact Analysis: Assessing how an initiative impacts a region or sector</ref> </references>