Impacts Classified

Economic impacts typically are divided into two groups: initial impacts and ongoing impacts. In most cases, initial impacts occur in the "action" period of the motivating activity, such as during development and construction of a real estate project.

Initial impacts occur only one time, and they disappear once the action phase is completed. Ongoing impacts begin after the action phase is completed, are repetitive in nature and may continue year after year. Retail and local property taxes are examples.

Economic impacts, whether initial or ongoing, can be further classified by four broad categories: direct, indirect, induced and total impacts. Direct impacts are new business sales, earnings, employment and taxes originating from the initial project expenditures, such as construction material purchases, construction employment and wages paid during the construction of a house.

Indirect effects, also called secondary, ripple or spillover effects, consist of additional business sales, employment and taxes generated from the original primary expenditures. When builders buy goods and services to construct a house, the suppliers of the goods and services purchase goods and services from other suppliers, generating additional earnings and employment.

Induced impacts result as direct earnings are spent on subsequent goods and services. For instance, as construction workers spend their wages, they stimulate further spending. The total impact is the sum of the direct, indirect and induced impacts.

Economists use the concept of a multiplier to express the quantitative relationships between initial, direct expenditures and additional, future expenditures stemming from the initial expenditures. An individual multiplier is associated with each of the indirect, induced and total impacts.

or instance, a Real Estate Center input-output model estimated that one dollar spent to construct a single-family house in Texas in 2002 generated 51 cents in indirect expenditures and a further 18 cents in induced expenditures, resulting in $1.69 in total expenditures. The employment multiplier was an estimated 0.47; that is, every construction job created to build a house generated an additional 0.47 jobs in the state.

Area of Analysis

Economic impacts are identified and measured relative to a defined geographical area. Depending on the purpose of the impact study, the analysis area might be a state, county, city, local community, nation or even the world. The analysis area encompasses the place where the original activity takes place and any other areas that might be impacted by the activity.

For the purposes of the study, the defined analysis area is treated as an economic "country," and goods and services purchased from and sold to other areas are treated as "imports" and "exports." The choice of the analysis area has important implications for quantifying the economic impacts. Purchasing bricks for a house from a brick manufacturer located within the area creates more local jobs than if the bricks are "imported" (purchased from a manufacturer outside the area).

A construction project may have little local economic impact if most of the initial expenditures go outside the area. This is why many jurisdictions have a local content requirement for major construction projects.

Direct Spending Critical

orrectly specifying an activity's initial, direct cost and any ongoing expenditures is the key to estimating total potential impacts. All other economic impacts derive from the direct and ongoing expenditures. But measuring the amounts and types of expenditures of projects often presents interesting challenges. Construction project costs, for example, are divided into hard and soft costs. Interest payments on construction loans often go outside the region, labor or materials may come from outside the area, and the costs may be spread out over time for large, multiyear projects.

Economists use an analytical framework called an input-output model for estimating total economic impact generated from initial expenditures. An input-output model is a table of purchases and sales by all industries to and from each other in the area of analysis. The input-output model is an essential tool of economic analysis in economic impact studies, so much so that its inventor, Harvard professor Wassily Leontief, was awarded a Noble Prize in economics in 1973.

The model computes new business sales, employment, value added and taxes for all industries resulting from the direct initial and ongoing project expenditures. Input-output models are extremely complex and expensive, requiring substantial data and skill to build. Most economic impact studies, therefore, rely on existing multiplier estimates developed by known research organizations that specialize in developing the models. One model used quite often is the table of regional multipliers developed by the Bureau of Economic Analysis.

Dr. Anari (m-anari@tamu.edu) and Dr. Gaines (jpgaines@tamu.edu) are research economists with the Real Estate Center at Texas A&M University.