What Is an Economic Impact? Definition & Examples

Economic impact refers to the effect an event, policy, or market change has on the economy of a region or country. It encompasses changes in areas such as employment, productivity, and overall economic growth. Understanding these changes is important for evaluating the financial effects of various activities and decisions.

Understanding Economic Impact

Economic impact analysis systematically estimates the economic effects of a particular activity or event on an economy. This assessment considers how an action creates a ripple effect through industries, households, and government entities. The total economic impact is typically broken down into three main categories: direct, indirect, and induced impacts.

Direct impacts are the initial changes in the economy directly caused by an event, investment, or activity. For instance, when a new business opens, the direct effects include the jobs created at that business and its initial expenditures.

Indirect impacts result from the supply chain activity generated by these direct effects. This involves the business-to-business purchases made by the directly affected entities within the region. For example, a newly opened factory will purchase raw materials and services from local suppliers, leading to increased activity for those suppliers.

Induced impacts capture the additional economic activity driven by spending from wages earned by workers in both the direct and indirect stages. When employees of the directly and indirectly impacted businesses spend their income on local goods and services, it generates further economic activity.

How Economic Impact is Measured

Economic impact studies generally estimate the total dollars, jobs, and household income generated in an economy due to a new activity. These studies often use input-output (I/O) models to measure the various effects of economic activity. These models provide a detailed picture of the flow of products and resources within an economy.

A central concept in measuring economic impact is the economic multiplier. A multiplier measures how initial dollars injected into a community are respent, leading to additional economic activity. For example, a $1 change in sales can have a combined effect on the output of all local industries that is greater than $1. Multipliers are specific to a region and an industry, quantifying economic activity generated beyond initial direct spending. They account for the recirculation of money through purchases of local inputs and consumer expenditures.

Key Metrics of Economic Impact

Economic impact is measured using several quantifiable outcomes.

• Jobs created or supported refers to the headcount of positions.
• Labor income, or household earnings, represents the total value of employment-based income paid to households, including wages, salaries, benefits, and business owner profits.
• Output or sales revenue quantifies the total value of goods and services produced or sales made. This metric represents money spent on inputs and revenue from selling the final product. While broad, it can involve double-counting.
• Tax revenue measures the increase in local, state, or federal taxes generated by economic activity. This includes sales, property, and income taxes that flow to government entities. Fiscal impact on government budgets is a significant consideration.
• Gross Domestic Product (GDP) contribution, or value added, is a key measure of economic activity. It estimates the increase in a region’s total economic output, similar to a nation’s GDP. This metric represents incremental value created, avoiding double-counting.

What Influences Economic Impact

Economic impact is influenced by factors inherent to the activity and the regional economy. Different industries exhibit varying multiplier effects due to their operational structures and supply chain dependencies. For example, a manufacturing industry might have a higher multiplier than a service industry if it relies more heavily on local suppliers and labor.

The characteristics of the local economy also play a significant role in determining how much of an impact stays within the area. Factors like a region’s size, diversity, and unemployment rate affect its capacity to absorb and recirculate new economic activity. A larger, more diverse economy with available labor can retain more economic benefits.

The strength of local supply chains is another influencing factor. When businesses source inputs and services locally, it enhances indirect and induced impacts by keeping money circulating within the region. Conversely, importing goods and services from outside the region results in economic “leakages” that reduce the overall local impact.

Consumer spending habits among local residents also influence induced effects. The proportion of income spent locally, after accounting for taxes and savings, directly contributes to further economic activity. The capacity of existing infrastructure, such as transportation networks and utilities, can also affect efficiency and growth potential.

Examples of Economic Impact

Economic impact is assessed in various real-world scenarios to understand financial consequences. The opening of a new business provides a clear example, as it directly creates jobs and generates sales revenue. Indirectly, this new business purchases supplies from other local businesses, and its employees spend wages within the community, stimulating further activity in sectors like retail and housing.

Major sporting events or festivals also demonstrate significant economic impacts. These events attract visitors who spend money on accommodation, food, transportation, and entertainment, representing a direct economic injection. Local businesses supplying services to event organizers and attendees experience indirect benefits, while spending by event staff and local workers creates induced economic activity.

Large infrastructure projects, such as a new bridge or airport expansion, generate substantial economic effects. Direct impacts include jobs for construction workers and purchases of building materials and equipment. Indirectly, suppliers to the construction industry benefit, and wages earned by these workers lead to induced spending in local businesses.

Anchor institutions like a university or hospital provide ongoing economic impact. These institutions directly employ a large workforce and make significant operational expenditures. Their operations create demand for local suppliers, and spending by faculty, staff, and students generates induced impacts on the local economy, affecting sectors from housing to restaurants.