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Economic Impact 101

Before pursuing an economic impact study, some key questions you should consider are:

  • What key questions do you need to answer through this study? Does your need match what an economic impact study can accomplish?
  • What is the ultimate purpose of the study? How will you use the findings?
  • What is the scale of the impact (i.e. the size of the economy you are studying)? The larger the scale, the more difficult it is to effectively measure economic impact.
  • Does the size of the activity relative to the size of the economy justify exploring the activity’s impacts? Will it have enough ripple effects?
  • Is this study examining a one-time event or a larger industry change in your economy?
  • Are you interested only in the dollar impact, or are there other impacts you need to explore?

In addition to the above, other key considerations when talking with a consultant about doing a study

  • Has the consultant articulated how the final report will address the ultimate needs you’ve articulated?
  • Does the consultant’s proposal describe how they will collect the data to identify the direct effect as much as they describe the I/O model they use to estimate indirect and induced effects. In many cases, the direct effect comprises the largest part of the final impact number, yet it can also be the most difficult and nuanced data to assess. 

What does an economic impact study do?

Economic impact studies estimate the total dollars, jobs, and household income generated in an economy due to a new activity; for example, a business coming to or growing in the region, a festival, construction of an event center. The emphasis is often on what new money will come into the economy because of this new activity/intervention?

Economic impact is a tool to aid policy, program and project decision making by assessing…

  • Economic impacts including changes in income and employment
  • Fiscal impacts (often termed “value-added”)
  • Regional procurement needs
  • Workforce planning
  • Future community needs due to new and growing population: housing, schools, roads

To provide these assessments, economic impact studies should clearly convey the time period of the study; the economy/region analyzed; as well as the methods, data, and assumptions made to obtain the final dollar and jobs estimates.

What does an economic impact study NOT do?

Economic impact studies traditionally focus on the final dollar number. Unless specified, they may not account for the adverse or positive social, environmental or cultural impacts. The researchers of the study may also not connect these findings to implications for policy or future steps.

These studies usually use I/O models, which have limitations…

Traditional economic impact studies use an input-output (I/O) model to measure the direct, indirect, and induce effects of a new economic activity. Direct effects are the new money and immediate jobs coming into the economy due to the activity. Indirect and induced effects are the additional dollars and jobs generated by the spending of the initial businesses and residents affected by the new economic activity. Notice that the indirect and induced estimates are calculated on static models like IMPLAN or REMI. These models capture only a snapshot in time.

Static Model: Unlike real economies, the model will not change based on the intervention. For instance, if Amazon were to move into a small to mid-sized economy, it would drastically change how the economy functions. An I/O model would only estimate the impacts of the initial money coming into the economy, not the ensuing growth in the economy such as new business and industry formation. So the long-term impacts could be even greater (or more adverse) depending.

Fixed Prices: I/O models assume there are no price adjustments in response to supply constraints or other factors. For instance, if Amazon were to enter a community and hire all the IT workers, the limited supply of workers would inevitably increase regional wages. The model assumes enough workers are present and that wages never increase. 

Alternatives or Complements to Economic Impact

There are several other useful economic evaluation tools that aid in the decision making process. Often, these analyses follow similar steps and may be add-ons to an economic impact study; however, they do not examine the economic impact of an intervention.

Economic Contribution Study

Contribution studies are frequently confused with economic impact studies. This analysis looks at the total dollar, jobs, incomes, taxes and other economic activity a particular policy, program, business or project generates. However, when conducting a contribution study an analyst does not ask the question “would this money be in the economy without the subject of study?” As such, all or part of the final dollars stated in this study could be attributed to other economic activities in the region, not just the intervention, leading to double or triple counting of dollars within the economy. However, contribution studies may also account for money that does not leave the region as a result of the activity (e.g. spending by residents). 

Cost-Benefit Analysis

This form of analysis is able to evaluate a large range of projects that encompass more than direct economic activity while accounting for the costs associated with that activity. While it may use an I/O model to account for economic benefits, it will add other methods to assess other benefits and costs of the activity. For instance, a community development project looking to enrich a downtown area with an art installation may not generate economic activity. However, there are several tangible societal and community benefits derived from the installation that have economic value. 

Read our Richmond Times Op-ed

Written By Faculty Partners at Five Virginia Univerisities:

Sarah Lyon-Hill, Virginia Tech
Albert Alwang, Virginia Tech
Jeff Alwang, Virginia Tech
Barbara Blake Gonzalez, Old Dominion University
Terry Clower, George Mason University
Fabrizio Fasulo, Virginia Commonwealth University
Conaway Haskins, Virginia Tech
Bob McNab, Old Dominion University
Tom PlaHovinsak, Longwood University
John Provo, Virginia Tech

8 ways to know it is a quality study

  1. Defines the activity that brings in or generates new money in the economy.
  2. Identifies the economy of study. The region should make sense to the context of the study. One way to overinflate the final results is to choose an unnecessarily large region.
  3. Attempts to eliminate other contributing factors for why “this money” is in the economy. An economic impact study asks, “Would this money be in the economy without the activity?”
  4. Clearly describes the time period being analyzed, the methods and data being used, and the assumptions made.
  5. Accounts for what other activities are “crowded out” by the intervention. For example, other businesses that close as a result of a new business.
  6. Accounts for possible negative side effects of the intervention. E.g. trash from a festival or pollution from a business.
  7. Explores or touches on policy implications or recommendations. Does the study lead the reader to think about what could be done to grow economic impact?
  8. Has reasonable multiplier estimates. Be skeptical of studies with multipliers higher than 3.0.