About Economic Impact Analysis
Economic changes affect communities in a number of ways, both large and small. When a plant opens or closes, or when natural and economic disasters blow through, local leaders need information to make informed and proactive decisions.
That's why University of Minnesota Extension offers the Economic Impact Analysis (EIA) program, which uses IMPLAN™ software and descriptive reports to inform community planning.
Here's how and who uses economic impact analysis reports
- Community leaders use reports to quantify the effects of real or proposed changes on their local economy, so they can make better decisions for the common good.
- Community leaders, including elected officials, also use reports to inform their public finance decisions and increase outside support, if necessary.
- Community organizations use reports to educate residents and create support for local business.
- Economic development organizations use reports to write proposals and describe their local economy to potential new businesses.
- Economic development organizations also use report data in their work with existing businesses on strategic planning.
What questions does an EIA report answer? Here are a few:
- How many jobs would be affected by this change?
- Which businesses would be most affected?
- How far-reaching would the effects be?
- How are local businesses connected, and how would change at one affect others?
- How much would total wages change?
- How would this change contribute to or take away from the local economy?
We approach working with community leaders in a way that values their understanding of the local economy. We start projects by collaborating with leaders to formulate questions. Getting the questions right is usually the hardest part of a project, but once that's done, we work together to find the answers.
Sometimes we need to collect more detailed information about the community or the specific change (past, present, or future) that will affect its economy. We call this process "ground truthing," because we ask local leaders and residents what's really happening "on the ground." We also get their reactions to the data we present. Local leaders are vital to our process — they bring valuable insights to our research and ensuing efforts to craft a community vision.
To do our work, we use an economic modeling tool called IMPLAN. IMPLAN is based on input-output modeling, a proven economic method that illustrates how different parts of an economy are interdependent. With IMPLAN, we can estimate ways in which changes in one part of a local economy might impact other parts, or how changes in one local business might affect others in town.
Economies are complicated structures, but input-output analysis nicely cuts through the maze. We start by building a database that yields a spending profile for each business and for households in a community; then we put together a picture of how these businesses interact with each other.
The process also involves asking questions, such as "What if spending in industry A is cut in half? Which other industries will be affected locally?" Once we get the answers, IMPLAN sorts the data into three types of impacts:
- Direct Impacts, which derive directly from an activity or event;
- Indirect Impacts, which are generated as a result of business-to-business transactions and
- Induced Impacts, which are generated as a result of consumer-to-business transactions.
We spend our time in research projects trying to get information about a few basic areas. For projects physical development projects we almost always want to know; how many people where employed in the construction of the project? How many are employed in the on going operations of the project? How much output does the project produce? Who are the suppliers? Who are the customers? How many customers/ suppliers/ employees are local?
When we study an industry or something with multiple sites, we want to know a few additional questions; how many sites are there? how much economic activity does each site contribute?
When we study something related to tourism we ask our standard questions, plus work to gather information about visitors such as; where are people coming from? What does their spending typically look like when they visit (where do they shop? What to they buy?), how many visitors come and how often?
There's more to all this, of course, but the key thing to remember is that input-output analysis quantifies the effects of change on your local economy and provides valuable perspectives to community decision makers working for the public good.