ECONOMIC IMPACT CONCEPTS


An economic impact analysis estimates the

Several measures of the changes in economic activity can be generated. The most widely used are changes in sales (or spending), changes in regional income, and changes in employment. The spending of visitors within the local area becomes sales or receipts for local businesses or other organizations selling products and services to visitors. Income is the sum of wage and salaries accruing to workers in these businesses and proprietor's income and profits. Employment is the number of jobs supported by the given level of sales. The IMPLAN estimates of jobs are not full time equivalents, as they include part time and seasonal jobs.


A region must be defined to identify what spending and economic activity to include. We consistently define the region around recreation/tourism sites to be all counties within 30 miles. Only spending that takes place within 30 miles of the destination is included as stimulating the changes in economic activity. Measures of impacts only include businesses within this approximately 30 mile region. The size of the region influences both the amount of spending captured and the multiplier effects.

For recreation and tourism, the action for which impacts are estimated is usually the opening or closing of a facility, or more generally some change in the quantity or quality of facilities or marketing efforts that would alter the number of visitors, types of visitors and spending in the local area. As with any impact analysis, we would like an estimate of the changes with Vs without the action, not just before Vs after.

The specific actions that correspond to the impact analyses reported here are hypothetical ones. The impact measures can be interpreted as estimates of changes in economic activity that would result from the closing of a project (for recreation). Our estimates assume that all visits and associated spending would be lost to the region, if the site were unavailable for recreation. The validity of this assumption rests on the availability of other substitute opportunities in the area with the capacity to absorb additional use, and the importance of recreation at the project as a motivation for trips that involve a visit to the area.

The assumption that all spending would be lost to the area is less tenable for local users. Much of this spending would simply shift to other sectors of the economy, although some would likely be lost as local residents choose to go outside the region for the recreation opportunities that might be lost. Visitors from outside the local area, would presumably not come to this region if the recreation opportunities were not available. Hence, all of the spending on these trips would be lost to the region. To distinguish between local and non-local visitors, two distinct impact analyses may be carried out.

Impact vs Significance Analysis

An impact analysis only includes spending by visitors who reside outside of the local region. Their spending constitutes "new dollars" to the region. A significance analysis includes the effects of spending by all visitors, both those who reside in the local area and those who do not. The significance analysis should generally not be interpreted as an estimate of the loss to the local region if the project were closed, since much of the spending by local residents would likely stay within the region, but perhaps be shifted to other sectors. The significance analysis is better seen as a measure of the importance or significance of the project (rather than impacts) within the local economy as it shows the size and nature of economic activity associated with visits to the project.

Input-Output Analysis Terminlogy

Other economic impact terms arise from the methods used to estimate impacts. The most widely accepted approaches are based on input-output models. An input-output model is a representation of the flows of economic activity within a region. The model captures what each business or sector must purchase from every other sector in order to produce a dollar's worth of goods or services. Using such a model, flows of economic activity associated with any change in spending may be traced either forwards (spending generating income which induces further spending) or backwards (visitor purchases of meals leads restaurants to purchase additional inputs -- groceries, utilities, etc.). By tracing these linkages between sectors, input-output models can estimate secondary effects of visitor spending, usually presented in the form of multipliers.

Secondary effects of visitor spending are of two types: indirect and induced. Indirect effects are the changes in sales, income or jobs in sectors within the region that supply goods and services to the tourism sectors. The increased sales in linen supply firms resulting from more motel sales is an indirect effect of visitor spending. Induced effects are the increased sales within the region from household spending of the income earned in the tourism and supporting sectors. Motel or CE project employees spend the income they earn from tourists on housing, utilities, groceries, etc. These represent induced effects.

Multipliers capture the size of the secondary effects, usually as a ratio of total effects to direct effects. Total effects are direct effects plus the secondary (indirect plus induced) effects. A sales multiplier of 2.0, for example, means that for every dollar received directly from a visitor, another dollar in sales is created within the region through indirect or induced effects. Multipliers are frequently misunderstood and misused and must be understood and applied with the context of the input-output model from which they are derived. A complete discussion of multipliers is beyond our scope here, but we will attempt to clarify the two most common sources of abuse by introducing the "capture rate" and discussing differences between the basic types of multipliers. Abuses largely come down to what a given type of multiplier should be multiplied by.

Multipliers should generally NOT be multiplied by total visitor spending. A sales multiplier is multiplied by a change in final demand within the region to yield the total change in sales including direct, indirect, and induced effects. Due to the way that input-output models are structured, all visitor spending does not accrue to the region as final demand. The primary problem is with retail purchases of goods. For goods that are manufactured outside of the region, only the retail margin and perhaps some portion of the wholesale and transportation margins appear as final demand for the region. The cost (producer price) to the retailer or wholesaler of the good itself leaks immediately out of the region's economy. The capture rate measures the portion of spending that accrues to the region as final demand. Only the spending that is "captured" by the local economy should be multiplied by a sales multiplier.

An example should illustrate. Suppose a tourist purchases a camera for $100 while on a trip to the region. Assume the retail margin is 30%, or $30. Assume the wholesaler and shipper reside outside the local area, as does the company that manufactured the camera. The direct effect or final demand change in the local region is only $30, the other $70 immediately goes outside the region to cover cost of the good and shipping and wholesale. The $30 that does accrue to the region is placed in the retail trade sector. The input-output model examines the businesses that the retail store buys goods and services from to estimate indirect effects and uses the portion of the $30 that goes to wages and salaries of employees to estimate induced effects. Assume that a gross sales multiplier for the retail trade sector including both indirect and induced effects is 2.0, i.e., every dollar of sales in retail trade creates another dollar of spending through secondary effects. Notice that the total impact on the region is not two times the original $100 in spending, but instead two times the $30 captured by the local economy = $60. We get the correct result if we multiply visitor spending times the capture rate times the sales multiplier. An adjusted or "effective spending multiplier" equal to the capture rate times the sales multiplier can be multiplied by visitor spending to yield the correct impact.

Besides sales multipliers, one can also produce income and employment multipliers. There are two quite distinct kinds of income and employment multipliers. Ratio type multipliers like the sales multiplier, are simply the ratio of total income (or jobs) to the direct income (or jobs). These multipliers should be multiplied by the direct income or jobs to yield a total. Keynesian income or employment multipliers (also called response coefficients) are ratios of total income (or jobs) to direct sales. Keynesian multipliers estimated from an input-output model must be adjusted by the capture rate before multipliying them times visitor spending.

COMMON ERRORS IN RECREATION AND TOURISM ECONOMIC IMPACT ANALYSIS