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Input-Output Analysis

Input-Output Analysis. Input-Output analysis creates a picture of a regional economy describing flows to and from industries and institutions. Examples of Interrelationships Between Sectors:. Sectors purchase from other sectors Sectors sell to other sectors

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Input-Output Analysis

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  1. Input-Output Analysis

  2. Input-Output analysis creates a picture of a regional economy describing flows to and from industries and institutions

  3. Examples of Interrelationships Between Sectors: • Sectors purchase from other sectors • Sectors sell to other sectors • Sectors sell outside the local economy • Sectors buy outside the local economy • Sectors pay their employees • Sectors pay taxes

  4. Inputs $ Products $ Basic Industry $ $ Labor Inputs Goods & Services Households Services $ $ $ Overview of Community Economic System

  5. Input-Output Models • An input/output table quantifies the transactions between sectors in an economy. • It’s a “snap-shot” of the economy for a one-year period. • By understanding these linkages, we are able to predict how a change in one sector will affect the other sectors. • Multipliers can be estimated.

  6. Purchasing Sectors ($ million) Agriculture Health Services Final Total Demands Output Agriculture 10 6 2 18 36 Health 4 4 3 26 37 Services 6 2 1 35 44 Final 16 25 38 0 79 Payments Total Input 36 37 44 79 196 Selling Sectors ($ million) Example: Transactions Table

  7. Predictive Use of Input-Output Analysis • Impacts are tracked throughout the economy • Multipliers are derived from regional economic accounts • Only local transactions are used to create the multiplier effect

  8. Multipliers

  9. What are Multipliers? Multipliers measure total change throughout the economy from a one unit change for a given sector.

  10. Multipliers • Direct effects represent direct or initial spending • Type I - Direct and indirect effects include the direct spending plus the indirect spending or businesses buying and selling to each other • Type II - Direct, indirect and induced effects include direct and indirect plus household spending earned from direct and indirect effects

  11. Multipliers Continued • Three multipliers are used to describe the economic impact: • Employment • Income (Value-Added) • Output (Receipts)

  12. Interpretation of Multipliers • You will often see values for multipliers in the media, the interpretation of these numbers typically causes confusion Example 1 • Type II employment multiplier (Ag) = 2.25 • When the Agricultural Sector realizes a 1 employee change, total employment in the study area changes by 2.25 jobs from direct, indirect and induced effects

  13. Multipliers Continued Example 2 Type II Income Multiplier (Ag) = 1.78 When the Agricultural Sector realizes a $1.00 change in income, total income in the study area changes by $1.78 from direct and indirect linkages

  14. Multiplier Cautions (Very Important) • Multipliers are NOT interchangeable (i.e. employment and value added multipliers are very different, thus you can’t use one for the other) • Not transferable to other study areas or across different time periods • No differentiation between full-time and part-time jobs • Results less certain for new types of economic activity • They do tend to overstate the impact of change • Take caution for multipliers larger than 3

  15. IMPLAN Software • A talented person could probably figure out relationships for a 6 sector economy • An economy with more than 500 sectors is another story • IMPLAN software does the work for us and calculates multipliers • IMPLAN is relatively expensive, hence the need for a partnership with the University

  16. Pushing the local initiative • “Kentucky Proud” • “Buy Local” • When we keep our money local, the multipliers are larger allowing more money to flow in the local economy, resulting in higher incomes for local residents

  17. Local Examples • The Economic Impact of Various Health Related Services on the Local Economy • Impact of Health Sector • Impact of a Rural Physician

  18. Economic Impact of Health Care Sector

  19. Employment Multiplier: 1.21 For every employee hired in the health sector there are an additional 0.21individuals employed because of indirect and induced effects. Output Multiplier: 1.22 For every $1 of sales in the health sector there is an additional $0.22 of revenue generated due to indirect and induced effects Interpretation

  20. The Economic Impact of a Rural Physician in Kentucky

  21. Other Interesting Potential Economic Impact Studies • The Economic Impact of the new sports complex in Knott County • The Economic Impact of Eco-tourism in Eastern Kentucky • The Economic Impact of Agriculture in Kentucky • The Economic Impact of a manufacturing firm leaving a rural town

  22. Model Limitations • Based on a set of assumptions that might restrict the model. Other modeling techniques can be used to provide a range of impacts, not one single number • Economic impacts should only be part of the discussion. We should not ignore the following: • Quality of Life • Environmental Impacts • Social and Cultural History • Equity Impacts THIS IS WHY COMMUNITY INVOLVEMENT IS VITAL

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