Economic impact analysis

Definition

Economic impact analysis is a method used to assess the economic effects of a specific event, policy, or project on an economy. This analysis evaluates changes in economic activity and the broader implications on employment, output, and income within various sectors. It often utilizes models that can capture both direct and indirect effects, thereby providing insights into how changes in one part of the economy can ripple through others.

5 Must Know Facts For Your Next Test

1. Economic impact analysis often employs the Leontief inverse to calculate the total effects of an economic change across different sectors.
2. The analysis distinguishes between open and closed models, with open models allowing for imports and exports, while closed models assume a self-contained economy.
3. Economic impact studies are commonly used by governments and organizations to justify funding decisions for projects like infrastructure development or public events.
4. The assessment typically includes measuring changes in employment levels, business revenues, and overall economic output resulting from the analyzed event or policy.
5. Results from economic impact analysis can inform policymakers on the potential benefits or costs associated with new regulations or investments.

Review Questions

• How does economic impact analysis utilize the Leontief inverse to measure the effects of an economic change?
  • Economic impact analysis leverages the Leontief inverse matrix to quantify how a change in one sector's output affects other sectors. This matrix allows analysts to calculate total effects by showing how initial changes lead to further demands across interconnected industries. By applying this tool, analysts can effectively illustrate the ripple effect of economic activities throughout an economy.
• Compare and contrast open and closed input-output models in the context of economic impact analysis.
  • Open input-output models incorporate external factors such as imports and exports, allowing for a more comprehensive view of how an economy interacts with the global market. In contrast, closed input-output models assume a self-contained economy without foreign trade influences. This distinction affects the accuracy of economic impact analysis, as open models provide insights into how external economic conditions can alter local outcomes, while closed models focus solely on internal dynamics.
• Evaluate how economic impact analysis informs policy decisions regarding public investment projects.
  • Economic impact analysis plays a crucial role in guiding policy decisions about public investments by forecasting potential economic benefits and costs. By quantifying expected increases in employment, income, and business activity resulting from a project, policymakers can assess whether the benefits outweigh the investments required. Moreover, understanding both direct and indirect effects enables more informed discussions about resource allocation and prioritizing projects that yield the highest return on investment.

Related terms

Input-Output Model:

A quantitative economic technique that represents the interdependencies between different sectors of an economy, illustrating how output from one sector is an input for another.

Multiplier Effect: The phenomenon whereby an initial change in spending (like investment) leads to a larger overall increase in economic activity due to subsequent rounds of spending.

Direct, Indirect, and Induced Effects: Different types of economic impacts: direct effects arise from immediate changes in activity, indirect effects stem from the supply chain impacts, and induced effects result from increased income leading to additional spending.