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IMPLAN Blog

What is Net Analysis?

November 12, 2019 by Joe Demski

All industries love touting their growth and positive effect on their regions. New product offerings, business relocation decisions, or increases in employment make for tremendous headlines, but general input-output models do not account for any economic trade-offs or negative effects. So how can you ensure that the figures presented are sound? Enter net analysis. Net analysis provides a holistic look at the effects resulting from a change in production or spending in the economy, both the positive and negative.

What Makes Net Analysis Important?

Economic impact studies are often met with a healthy amount of skepticism. Large positive contributions look great on paper, but, as with everything, all actions create a reaction. The mere arrival of a new store doesn’t mean that local purchasing power (the ability of residents to purchase goods and services) will increase. Instead, spending will be spread out among existing businesses. By incorporating net analysis into impact studies, modelers account for economic losses that would be incurred by businesses or industries affected by a change in the focused industry. Net effects require consideration in all economic modeling activity unless an industry is completely new to a region or the primary commodity is not produced by any other industry. This crucial piece of any economic study clearly defines all assumptions and provides a complete picture of economic impact in order to fortify credibility.

How Do I Approach a Net Analysis?

Background research is crucial when it comes to completing economic studies. In the same manner in which a framework is set to study positive economic effects, the potential negative effects on surrounding businesses should be considered. With any economic study, modelers should start by answering 5 basic questions:

  • Who: Which industry/business are you interested in modeling?
  • What: What is the change to that industry that you want to calculate the effect of?
  • Where: Where do you want to analyze the effects?
  • When: What is your time frame?
  • Why: Why should people care about your study?

These same questions also apply to applying a framework for net effects. They are:

  • Who: Which industry/businesses could be adversely affected?
  • What: What is the change to the affected industry?
  • Where: Where do you want to analyze the effects?
  • When: When is your time frame?
  • Why: Why should people pay attention to the potential losses in the region?

As with any analysis, background knowledge and further research is necessary to achieve a reliable Output. Determining what businesses would be adversely affected is dependent on the size of the study region and the presence of other businesses within that industry. Knowledge of the market is crucial to accounting for potential negative outcomes for surrounding industries. Remember, the negative impact may be occurring elsewhere in the country or world.

Retail Business Net Analysis

Net analysis is especially critical when you are interested in considering the economic contributions of a new retail business within your region. This is most widely discussed and exemplified by the “Walmart Effect.” This refers to the cost-benefit related to the opening of a new Walmart and the effect of driving down prices for surrounding existing businesses. The losses accrued by other business would need to be accounted for in any analyses (net effects can be even more radical when a Walmart store closes). 

 

In a more generic sense, consider that a new mall opens up in town. Presumably, there will be some overlap between the stores occupying that mall and businesses which already exist in the area. Some stores might move from an older mall to the newer one. While the new mall will likely contribute additional business to the region, not all the money spent in these businesses will be “new money.” The loss of business to existing, overlapping industries should also be included in any analysis.

Energy Sector Net Analysis

A shift in the source of energy production is a textbook example of the need for a net analysis. When the discussion arises to invest in a different energy source, the economic implications are often among the most actively evaluated, especially when it comes to renewable energy. If the decision is made to invest in a new energy source, modeling the increased output of new energy source would produce impact results. However, a net analysis of production change in the existing energy source would need to be completed in order to generate an accurate and whole view of the change. 

Consider a hypothetical energy production change in South Carolina. In this example, $100M of energy production will shift from fossil fuels to solar energy. This solar production increase would ultimately support more than 733 total jobs, but would not account for the jobs lost from the production minimization from fossil fuels. Removing $100M of production from the fossil fuel sector would result in a loss of more than 327 jobs. Indirect jobs are affected more adversely by the decrease in fossil fuel production, due to the larger supply chain that is supported by the industry. Modeling these scenarios together and accounting for the 327 lost jobs in fossil fuel production results in 405 net jobs supported (rather than 733). Performing the net analysis provides outputs that are more encompassing of all effects and paints a more complete economic portrait.

Solar Energy Production Net Analysis

IMPACT

JOBS

LABOR INCOME

VALUE ADDED

OUTPUT

Direct

361.32

$9,969673.77

$38,785,250.19

$0

Indirect

-14.50

$327,255.09

$455,491.28

-$1,000,624.64

Induced

58.80

$2,335,468.93

$4,301,464.90

$7,618,627.08

Total

405.63

$12,632,397.78

$43,542,206.38

$6,618,002.44

 

Healthcare Industry Net Analysis

Calculating the economic impact of healthcare operations requires unique considerations. Unlike an emerging retail industry, any region will be served by some healthcare option. In other words, when a community hospital closes, the people that facility served don’t simply stop needing healthcare, they just leave the community to fulfill that need. The inverse is true of a new healthcare option. A new hospital has the potential to generate a significant impact particularly if new treatments are provided or the facility is able to attract patients from surrounding regions. 

This is exemplified well in a study completed by Oregon Health & Science University (OHSU). OHSU is the only academic health center in Oregon and serve more than 300,000 patients every year. They determined their annual economic output as $4.3 billion with 33,685 jobs supported. The report goes on to point out, “...without OHSU, some economic activity caused by patients and students would go to other hospitals or schools in Oregon. Other economic activity would leave in the absence of OHSU.” With this in mind, economic activity that would be retained by Oregon totaled $1.9 billion dollars, so OHSU overall net economic impact totaled $2.4 billion. 

What to Take Away

These outlined scenarios are textbook net analysis examples, however it should be considered in nearly all economic impact studies. It is very rare for any shock to the economy to result in positive outcomes for all parties. The benefits of the emergence of a new industry or growth of a business will affect other interrelated businesses. The execution of a net analysis ensures that you examine your economy comprehensively, advances your study’s credibility, and promotes an accurate overall economic portrait.

An overview to communicating the technical and creative elements of your economic impact study clearly and persuasively.

Topics: Data, Economics, Methodology, Impact

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