Economic Impact Analysis
A large project, such as construction of a major highway or development of a large mine, will have a significant impact on the economy. The spending in the construction and operating phases will generate income and employment, and public sector decision-makers often take these effects into account in deciding whether or not to undertake the project. An economic impact analysis is a different procedure from a cost-benefit analysis in that it attempts to predict, but not evaluate, the effects of a project. Since the data assembled in the course of a cost-benefit analysis are often used as inputs to an economic impact analysis the two types of analyses tend to become related in the minds of decision-makers and may be undertaken by the same group of analysts.
In this Chapter we survey briefly three approaches to economic impact analysis: the income multiplier approach; the inter-industry model; and the computable general equilibrium model. Use of the latter two approaches involves a degree of technical expertise and would generally not be undertaken by the non-specialist. In discussing economic impacts we emphasize that these are not the same as the costs or benefits measured by a cost-benefit analysis. However there may be costs and benefits associated with the project's economic impact and the decision-maker may wish to take these into account.
The decision whether or not to take the multiplier or flow-on effects into account in the evaluation should be based on an assessment of the extent to which similar such effects would or would not occur in the absence of the project in question. When choosing between alternative projects this would depend on the extent to which the multiplier effects can be expected to vary significantly between the alternatives; when faced with an accept vs. reject decision for a discrete project the analyst would need to assess whether the same investment in the alternative, next best use could be expected to generate multiplier effects of the same or similar magnitude. These points are taken up again in the discussion of the multiplier effects.
For simplicity, the concept of the national income multiplier can be developed in the context of a closed economy – one that does not engage in foreign trade. This simplifying assumption will be dropped later in the discussion.