Partners (Spring 1998)

Measuring Economic Impact

by Marie Easley

Q When is a dollar worth more than a dollar?
A. When it is re-spent successively in the local economy.

There are several ways to define economic impact. For example, if two local businesses buy ten dollar items from one another, one could say the total value of that exchange is $20. Another might argue that it's a wash; the economic impact is nothing because a net gain to the local economy has not occurred. Most experts agree, however, that some gain has been realized since the $20 stayed in the local economy instead of going elsewhere. Furthermore, because sales taxes are paid on the purchases, a portion of the taxes will go back into the community in the form of public services such as road construction and fire and police protection.

That $20 will probably be spent again. The sales revenues may be used to compensate the companies' employees. When these employees receive their checks, they will spend some of their earnings at the local grocery or department store, or maybe they'll go to the movies.

Because tracing the number of times each dollar of spending recycles through the local economy would be an impossible task, economists use the "economic multiplier" concept to symbolize the continual, but diminishing, number of times each dollar spent cycles through the economy. The ability of a local economy to capture a high percentage of successive spending largely depends on its size and the diversity of its economy.

Etching is by Sonya Thomas
Etching is by Sonya Thomas, senior printmaking student and Coca-Cola Scholar, The Atlanta College of Art © 1998

This multiplier, which represents the number of times this original $20 is spent within the community, is used to measure the economic impact.

Three types of economic impact are often measured:

Direct impact - Often called final impact, direct impact is measured by using per capita numbers supplied by management of a project or event, and would include financial information directly related to the project.

Indirect impact - Economic activity indirectly felt by businesses, such as meals bought in local restaurants during an event, is measured as indirect impact.

Induced impact - When surrounding businesses purchase additional products and services and hire more employees to meet the demand brought on by direct and indirect impact, and these employees then make their own purchases and stimulate the economy further, the result is measured as induced impact.

The economic multiplier concept quantifies the full economic effect of an organization's expenditures. The value of the multiplier depends on the percentage of income spent and re-spent, and the proportion of spending that flows outside the community - in effect, "exported" to another community.

An aggregate economic multiplier of 2.75, for example, would mean that, for each $1.00 spent on a project or event, $2.75 is generated. Subtracting the original $1.00 (direct impact) leaves $1.75 of additional spending on items and services (indirect and induced impact).

A meaningful measure of economic impact requires an accurate multiplier. In the following article detailing the multiplier effect resulting from the work of Chattanooga Neighborhood Enterprises (CNE), researchers at the University of Tennessee at Chattanooga used a multiplier of 1.65. Based on other community and regional economic impact studies that have applied multipliers from as small as 1.35 to as large as 4.0, as well as similar economic studies in the Chattanooga area that have used the 1.65 multiplier, according to Federal Reserve Bank of Atlanta Economist, Mark Rogers, the multiplier is considered reasonable for a metropolitan economy the size of Chattanooga.

Understanding the Economic Impact of Building One House in the Chattanooga Community

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