Economic Models for

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• Economic Models for
• Impact Assessment
• Steven R. Miller
• Senior Research Analyst
• Center for Economic Analysis
• Presented to the MI-SBTDC

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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

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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

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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 users understanding of the model structure
  in interpreting the results

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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 are assumed fixed
Wages are assumed flexible
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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

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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

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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.

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The Input-Output Table

• Input-Output table estimates what each industry
  buys from all other industries within the region
  to make a dollars 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

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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

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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 steel

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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

• 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

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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

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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.

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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)

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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

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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

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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

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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

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Comparison Tableau
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• For further information, contact

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Appropriateness of the Model Assumptions
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• Wages are allowed to change

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Appropriateness of the Model Assumptions
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• Wages are assumed constant