How It Works
Social Accounting- IMPLAN's Social Accounting System describes transactions that occur between producers, and intermediate and final consumers using a Social Accounting Matrix. One of the important aspects of Social Accounts is that they also examine non-market transactions, such as transfer payments between institutions. Other examples of these types of transactions would include: government to household transfers in the form of unemployment benefits, or household to government transfers in the form of taxes. Because Social Accounting Systems examine all the aspects of a local economy, they provide a more complete and accurate “snapshot” of the economy and its spending patterns.
Multipliers- "Multipliers are a numeric way of describing the secondary impacts stemming from a change. For example, an employment multiplier of 1.8 would suggest that for every 10 employees hired in the given industry, 8 additional jobs would be created in other industries, such that 18 total jobs would be added to the given economic region."
The Multiplier Model is derived mathematically using the input-output model and Social Accounting formats. The Social Accounting System provides the framework for the predictive Multiplier Model used in economic impact studies. Purchases for final use drive the model. Industries that produce goods and services for consumer consumption must purchase products, raw materials, and services from other companies to create their product. These vendors must also procure goods and services. This cycle continues until all the money is leaked from the region’s economy. There are three types of effects measured with a multiplier: the direct, the indirect, and the induced effects. The direct effect is the known or predicted change in the local economy that is to be studied. The indirect effect is the business to business transactions required to satisfy the direct effect. Finally, the induced effect is derived from local spending on goods and services by people working to satisfy the direct and indirect effects.
- Direct effects take place only in the industry immediately affected: if DEMCO lays-off 39 employees, the manufacturing industry loses 39 employees.
- Indirect effects concern inter-industry transactions: because DEMCO is closing, they will no longer have a demand for locally produced materials needed to produce their product. This will affect all of their suppliers, possibly resulting in a further loss of a few more jobs. Supplier employment loss as a result of the Direct effects would be the Indirect effects.
- Induced effects measure the effects of the changes in household income: employees laid-off by DEMCO and suppliers may reduce their expenditures in restaurants and shops since they are no longer employed. These changes affect the related industries.
- Impacts the total changes to the original economy as the result of a defined event. i.e. Direct effects + Indirect effects + Induced effects = Impacts
Once there is a clear picture of the economy through the Social Accounting Matrix (SAM) and Multipliers, its behavior can be predicted for a defined event: if DEMCO spent 20% of its earnings on bananas in 2006, then received an additional $1,000,000 of income from a new project in 2007, the banana industry could expect to make approximately $200,000 more that year. If 5% of the banana grower’s industry is spent on fertilizer, the fertilizer industry could expect $10,000 more; and so on. However, at each of these steps, each company will source some products out of the region of the economy of study. These are the losses that occur and eventually drive the cycle to zero. The total increase in economic activity from that million dollar project is the economic impact of the project; $1,000,000 spent became at least $1,210,000 of economic activity giving the DEMCO a multiplier of 1.21 - Every dollar spent on DEMCO creates 1.21 dollars of economic activity.
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