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IMPLAN Blog

Understanding IMPLAN: Multipliers

May 28, 2020 by Joe Demski

The foundation upon which IMPLAN economic impact analyses are built is the input-output (I-O) model, and the basis for I-O models are multipliers. Multipliers are rates of change that describe how a given change in a particular industry generates impacts in the overall economy (e.g. for every dollar spent in the economy an additional $0.25 of economic activity is generated locally, implying a multiplier of 1.25). What multipliers represent and how they are calculated can vary significantly. 

What Do Multipliers Represent?

With impact analyses, you can apply determined multipliers to whatever element you are seeking to quantify. Multipliers exist in the IMPLAN Model to describe rates of changes for several different variables: 

  • Output - Output is the base Multiplier from which all other Multipliers are derived. The Output Multiplier describes the total Output generated as a result of 1 dollar of Output in the target Industry. Thus, if an Output Multiplier is 2.25, that means that for every dollar of production in this Industry, $2.25 of activity is generated in the local economy: the original dollar and an additional $1.25.
  • Employment - Employment Multipliers describe the total jobs generated as a result of 1 job in the target Industry. Thus, if an Employment Multiplier is 2.33, that means that every Direct Job supports 2.33 jobs in the total economy: the original job and 1.33 additional jobs.
  • Labor Income - Labor Income Multipliers describe the dollars of Labor Income generated as a result of one dollar of Labor Income in the target Industry. A Labor Income Multiplier of 2.2 indicates that for every dollar of Direct Labor Income in this Industry another $1.20 of Labor Income is generated in the local economy.
  • Value Added - Value Added Multipliers describe the total dollars of Value Added generated as a result of one dollar of Value Added in the target Industry. A Value Added Multiplier of 2.3 indicates that for every dollar of Direct Value Added in this Industry another $1.30 of Value Added is generated in the local economy.

How are Multipliers Calculated?

Now that it is established what values you quantify with multipliers, let’s dig into the types of multipliers and how you calculate them. There are two types of multipliers found in IMPLAN which differ in their definition of "total" impact: Type I and Type SAM.

Type I - Type 1 Multipliers are representative of indirect effects. This type looks only at business to business purchases and does not include the effects of local household spending. This Multiplier is calculated as: (Direct + Indirect Effects) / Direct Effect.

  • Since the denominator for the multiplier is always 1.00, the Type I Multiplier will equal the Direct Effect + the Indirect Effect
  • Thus, the Type I Multiplier for Employment describes the direct and supply chain jobs within the study region resulting from one direct job.

Type SAM - Type SAM Multipliers are representative of the induced effects. SAM stands for social accounting matrix and in short, is the data representative of how households and government institutions spend their earnings in the economy after taxes, personal savings and so on. SAM Multipliers include the impact of Household spending and is the more commonly used Multiplier. It is calculated as: (Direct + Indirect + Induced Effects) / Direct Effect.

  • For example, the Type SAM Multiplier for Output describes the total output created in the study region resulting from one dollar of direct Output.
  • It also includes other non-industrial transactions, such as institution savings, payment of social security taxes, and commuting.

What is the Relationship between Effects & Multipliers?

Outputs from impact analyses are demonstrated as effects, and multipliers affect how you arrive at those values. When the dollars or jobs associated with all the rounds of local purchasing are summed, the resultant values are the effects. The relationship between multipliers and effects vary depending on the type of effects: direct, indirect, and induced. Direct effects are the values to which the multipliers are applied and trigger indirect and induced effects. Indirect and induced effects are the resulting values of the multiplier. The Multipliers represent 4 variables and are calculated differently based on what they constitute.

Direct Effect 

  • For Output, these effects are either 1.00 or 0.00. For every dollar spent in an Industry, if the Industry exists in the region, there is a dollar's worth of activity in the local economy. If the Industry doesn't exist in the region, the effect is 0.00.
  • For Employment, the Effect represents the number of jobs per $1,000,000 of production in the Industry.
  • Labor Income Effects represent the Labor Income dollars per $1,000,000 of production in the Industry.
  • Value Added Effects represent the Total Value Added and various Value Added subset dollars per $1,000,000 of production in the Industry.

Indirect Effects

  • For Output, the Effect represents the sum of local business to business purchases per dollar of Output.
  • For Employment, the Effect represents the number of jobs per $1,000,000 of business to business purchases by all resultant rounds of local Industry purchases.
  • Labor Income Effect represents the value of Labor Income dollars per $1,000,000 of business to business purchases by all resultant rounds of local Industry purchases.
  • Value Added Effect represents the of Value Added dollars per $1,000,000 of business to business purchases by all resultant rounds of local Industry purchases.

Induced Effects

  • For Output, the Effect represents the sum of local Household purchases per dollar of Output, based on Labor Income payments made by the target Industry and the local Industries from which they purchase.
  • For Employment, the Effect represents the number of jobs supported in local Industries per $1,000,000 of Direct spending in the target Industry as a result of Household purchases derived from Labor Income payments throughout all rounds of the impact.
  • Labor Income Effect represents the value of Labor Income dollars per $1,000,000 of Direct spending in the target Industry in local Industries as a result of Household purchases derived from Labor Income payments throughout all rounds of the impact.
  • Value Added Effect represents the Value Added dollars per $1,000,000 of Direct spending in the target Industry in local Industries as a result of Household purchases derived from Labor Income payments throughout all rounds of the impact.
  • Total Effects are the sum of the Direct, Indirect, and Induced Effects. For Output, this value is the same as the SAM Multiplier.

The Takeaway

The key to economic impact effects is multipliers. Understanding how multipliers are calculated is straightforward, but gathering the data necessary to determine them can be arduous. IMPLAN leverages trusted and granular data across 546 industries to calculate multipliers for any region of interest and ensure your analysis represents your complete impact.

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Topics: Data, Economics, Technology, Methodology, Impact

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