economic models for impact assessment steven r. miller senior research analyst
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Economic Models for Impact Assessment Steven R. Miller Senior Research Analyst Center for Economic Analysis Presented to the MI-SBTDC. Economic Models for Impact Assessments. An economic model is a simplification of reality - PowerPoint PPT PresentationTRANSCRIPT
Economic Models for Impact Assessment
Steven R. MillerSenior Research Analyst
Center for Economic Analysis
Presented to the MI-SBTDC
Economic Models for Impact Assessments
• An economic model is a simplification of reality
• Models are based on mathematical equations that provide a simplified picture of employment and income relationships
Economic Models for Impact Assessments, continued
• Economic impact models are used to assess the impacts of shocks to the existing economic structure
• Shocks take many forms– Increase in export demand for a locally
produced good or service– Increase in capital from outside the region
(SBA loans and grants)– Changes in federal, state, and local tax
codes– New social structures like an arena– Reallocation of resources from one activity
to another
Economic Models for Impact Assessments, continued
• The accuracy of the impact assessment depends on: – The appropriateness of the model
assumptions– The accuracy of the shock supplied to the
model– The user’s understanding of the model
structure in interpreting the results
Appropriateness of the Model Assumptions
• Consider two models of the labor market using different assumptions about wage rates.– Both models are valid, but the concept of
validity is a moving target
Wages
Employment0
D
S
D`
A B C
Wages
Employment0
D
S
D`
A B C
D D`
SWages
Employment0 A B C
SWages
Employment0 A B C
SWages
Employment0 A B C
Wages
Employment0 A B C
Wages are assumed fixed Wages are assumed flexible
Appropriateness of the Model Assumptions
• The fixed wage model produces a greater increase in labor for a given increase in demand
• The fixed wage model is most appropriate for– Small shocks to the economy– Economies with high unemployment
• The flexible wage model is most appropriate for– Large shocks to the economy– Economies with low unemployment
Types of Impact Assessment Models
Custom or Off-the-shelf?• Custom models generally
– Better represents the local economy– Are extremely expensive to acquire
• Off-the-shelf– Standardized structure across all regions– Less expensive to acquire
Off-the-shelf Models
• All off-the-self models share common characteristics– Use nationally standardized and reported
data– Rely on a core Input-Output model to
capture relationships across industries – Regional detail for models are generally
derived by adjusting national data to fit the local economy
• Hence, off-the-self models are fairly comparable.
The Input-Output Table
• Input-Output table estimates what each industry buys from all other industries within the region to make a dollar’s worth of output.
• When one industry increases production, it increases its purchases of inputs from other industries.
• Hence a $1 increase in production will generally lead to more than $1 increase in production in all industries
The Input-Output Table: Example
• Example– Steel industry uses coal to fire its blast
furnaces and to mix with iron ore– Coal industry uses steel in its equipment
and to brace tunnels• When steel is sold, demand for coal increases• When coal is sold, demand for steel increases
The Input-Output Table: Example
• Imagine that– $100 of steel requires $10 of coal– $100 of coal requires $5 of steel
• Imagine that both industries are found locally
• Consider the local impacts if a new customer buys $100 worth of steelDirect Impact 100.00$ SteelInterindustry Purchases 10.00$ CoalInterindustry Purchases 0.50$ SteelInterindustry Purchases 0.05$ Coal
110.55$ Total Impact
The Input-Output Table: Example
• Hence a $100 purchase has led to more than $100 worth of local production
• The ratio of Total Impact to Direct Impact is known as the multiplier and is always greater than 1
• In our example:Total Impact/Direct Impact = 110.55/100 = 1.1055
• This multiplier is the same if the increase in demand for steel is $100, $200, or $1 million
• Simply take the dollar value and multiply it by the multiplier to get the total impact
The Input-Output Table, Continued
• This example demonstrates the working of the core of all off-the-shelf models
• Rather than limiting the relationships to two industries, these models track the local input requirements of all local industries– RIMS, IMPLAN, and EconomicImpact
report the full spectrum of federally reported industries
– REMI aggregates industries into 169 categories
The Input-Output Table, Continued
• In a similar fashion household wages and expenditures are recorded. In the steel/coal example, – both the steel and the coal industries hire
additional workers to produce the added output
– These additional workers spend part of their wages on goods and services provided locally
– Benefiting firms will similarly hire additional workers to accommodate the increased demand.
Off-the-shelf Models, Continued
• Several options exist for off-the-shelf models.– BEA RIMS II (Bureau of Economic Analysis)– Impact and Planning (Minnesota IMPLAN
Group)– Policy Insight (REMI, Inc.)
– EconomicImpact (EMSI)
Back to Off-the-Shelf Models
RIMS II• Provides only the Multipliers for 473
industries• Useful in building custom models around the
input-output table• Inexpensive (about $225 per district)• Static, making no room for modification of
the underlying data• Data is updated every five-years
Back to Off-the-Shelf Models
IMPLAN Pro.• Provides the modeling environment used to
produce the RIMS II multipliers for 509 industries
• Dynamic in that it allows the user to provide informed modifications to the underlying data
• Inexpensive ($2000 per year)• Data is updated annually• Expands on RIMS to include flows to and from
government sectors• STRICTLY DEMAND DRIVEN
Back to Off-the-Shelf Models
Policy Insight• Expands on the IMPLAN methodology with
greater model coverage for 169 industries• Dynamic in that it allows the user to provide
informed modifications to the underlying data• Expensive (varies based on number of
industry components and geographic area for model)
• Relaxes many of the model assumptions fund in IMPLAN
• PROVIDES BOTH SUPPLY-SIDE AND DEMAND-SIDE IMPACTS
• Provides forecasts
Back to Off-the-Shelf Models
EconomicImpact EMSI (Limited information on)
• This model seems to be built to identify human resource needs (training, occupations, etc.)
• Provides the modeling environment used to produce the RIMS II multipliers
• Dynamic in that it allows the user to provide informed modifications to the underlying data before calculating the multipliers
• Web-based• Provides forecasts
Comparison Tableau
RIMS II IMPLAN REMI Economic Impact
Industries 473 509 169 500 Updates Every 5-years Yearly Yearly Every 6-months Periodicity Annual Annual Annual Annual Structure Input-Output Input-Output
(SAM) Hybrid Model Input-Output?
Employment Impacts No Yes Yes Yes Income Impacts Yes Yes Yes ?? Output Impacts Yes Yes Yes ?? Demographic/Household Impacts
No No Yes No
Includes Fiscal Impacts No Yes Yes No Provide Tax Policy Impacts
Indirectly Indirectly Yes Indirectly
Provides Baseline Forecasts
No No Yes Yes
Modifiable No Yes Yes Yes Provides Occupational Impacts
No No Yes Yes
Demographic Profiles None By Income Group
By Age, By Race, By Gender
By Age Group
Facilitates Cluster Analysis
No Yes Yes Yes
Cost to Acquire (excludes analysis)
$225 per district per 5-years
$2,000 per year for all districts
Variable (pricey) Variable (Not outrageous)
In Output RIMS IMPLAN REMI Direct Impact $200 Mil $200 Mil $200 Mil Input-Output
Increases demand for locally produced inputs
Yes Yes Yes
Suppliers to auto manufacturing increase demand for locally produced inputs into their production process
Yes Yes Yes
Increases in wages lead to increased demand for locally produced goods and services at the retail level
Yes Yes Yes
SAM Feedback
Increased wages and profits leads to increased income tax collection
No Yes Yes
Increased income leads to increased sales tax revenue
No Yes1 Yes
Hybrid Component Increase in the demand for workers Increases the wage rate
No No Yes
causes the average local price to increase relative to the nation
No No Yes
causes local production costs to increase making locally produced goods and services less competitive to the nation
No No Yes
causes increase in demand for taxable productive capital
No No Yes
Increase in wages and jobs increases labor in-migration
No No Yes
Increase in-migration rates lead to demographic shifts and increased government expenses and revenue
No No Yes
Output Multiplier 1.826498 1.474 Employment Multiplier 4.381753 2.909
1 Caveat: average indirect business tax includes sales tax revenues. The actual sales tax rate is not used.
• For further information, contactSteven R. Miller 88 Agriculture Hall Michigan State University East Lansing, MI 48824 (517) 355-2153 [email protected]