ECONOMIC IMPACT CONCEPTS

An economic impact analysis estimates the

changes in economic activity

within a region

resulting from some action

Several measures of the changes in economic activity can be generated. The most widely used are changes in sales (or spending), changes in regional income, and changes in employment. The spending of visitors within the local area becomes sales or receipts for local businesses or other organizations selling products and services to visitors. Income is the sum of wage and salaries accruing to workers in these businesses and proprietor's income and profits. Employment is the number of jobs supported by the given level of sales. Jobs are generally not reported as full time equivalents, as they include part time and seasonal jobs. Income or value added (includes income and indirect business taxes) are the preferred measures of the contribution of recreation and tourism to a region's economy.

A region must be defined to identify what spending and economic activity to include. The region of interest may be a local area, a multi-county region, one or more states, or the entire country. When assessing local economic impacts, we generally define the local region around recreation/tourism sites to be all counties within a given radius of the destination, usually a 30-60 mile radius. Only spending that takes place within this local area is included as stimulating the changes in economic activity. Measures of impacts are then for businesses and households within this local region. The size of the region influences both the amount of spending captured and the multiplier effects.

For recreation and tourism, the action for which impacts are estimated may be the opening or closing of a facility, or more generally some change in the quantity or quality of facilities or marketing efforts that would alter the number of visitors, types of visitors and spending in the local area. As with any impact analysis, we would like an estimate of the changes with vs without the action, not just before vs after. Thus an important first step is to estimate the increase or decrease in visitors that result from the action. In many recreation and tourism impact assessments, the action being evaluated is not directly stated. Frequently these studies measure the economic activity associated with a given number of visitors. Visitation and spending is not then attributed to any particular policy or action that is being evaluated. The impacts in this case can be interpreted as the loss in economic activity to the region if all of these visits and the associated spending did not occur in the region.

Economic impact methods

While economic impact analyses can get quite complicated, the basic procedure is quite simple. One must first estimate the change in the number and types of visitors associated with the policy or action being evaluated. Visits are translated into economic terms by estimating the amount of spending by these visitors in the local area. The spending can then be applied to a model of the region's economy to estimate the effects in terms of sales, income and jobs. Regional economic multipliers are used to estimate the secondary effects of visitor spending. Formally,

Economic impact = Number of Visitors * Average spending per visitor * Multiplier

This simple model is usually elaborated further by:

(1) dividing visitors into distinct segments with different spending patterns (e.g. campers, day users, visitors in motels)

(2) measuring spending in distinct spending categories (e.g. lodging, restaurant meals, gas, groceries)

(3) allocating spending into the economic sectors that receive it and applying economic ratios and multipliers for those sectors

Attributing impacts to the action being evaluated

Impact assessments may be ex ante, assessing likely impacts of proposed or hypothetical actions; or ex post, measuring economic activity associated with an historical or current action . When assessing impacts of existing recreation or tourism activity, the impact measures can be interpreted as estimates of changes in economic activity that would result from the loss of all visitors to the area. When applied to a particular facility or program, one must assume that all visits and associated spending would be lost to the region, if the facility were closed or program eliminated. The validity of these assumptions rest on the availability of other substitute opportunities in the area with the capacity to absorb additional use, and the importance of recreation or tourism as a motivation for trips that involve a visit to the area.

The assumption that spending would be lost to the area is less tenable for local users. Much of this spending would simply shift to other sectors of the economy, although some would likely be lost as local residents choose to go outside the region for the recreation or tourism opportunities that might be lost. Visitors from outside the local area, would presumably not come to a region if the recreation and tourism opportunities were not available. Hence, all of the spending on these trips would be lost to the region. Tourism impact assessments generally exclude spending by residents of the local area, if they can be separated out. In assessing impacts of visitors to a particular facility or event, this is not always possible. Seasonal residents pose some unique problems as they may be treated as local residents in some situations and outside visitors in others.

To distinguish between spending of local and non-local residents, two distinct impact analyses may be carried out, what we call "impact" and "significance" analyses. An impact analysis only includes spending by visitors who reside outside of the local region. Their spending constitutes "new dollars" to the region. A significance analysis includes the effects of spending by all visitors, both those who reside in the local area and those who do not. The significance analysis should generally not be interpreted as an estimate of the loss to the local region if the project/program were closed, since much of the spending by local residents would likely stay within the region, but perhaps be shifted to other sectors. The significance analysis is better seen as a measure of the importance or significance of the project/program (rather than impacts) within the local economy as it shows the size and nature of economic activity associated with recreation/tourism activity in the area.

Input-Output Analysis Terminlogy

A number of special economic impact terms arise from the methods used to estimate impacts. The most widely accepted approaches are based on input-output models. An input-output model is a representation of the flows of economic activity within a region. The model captures what each business or sector must purchase from every other sector in order to produce a dollar's worth of goods or services. Using such a model, flows of economic activity associated with any change in spending may be traced either forwards (spending generating income which induces further spending) or backwards (visitor purchases of meals leads restaurants to purchase additional inputs -- groceries, utilities, etc.). By tracing these linkages between sectors, input-output models can estimate secondary effects of visitor spending, often captured in the form of multipliers. Popular input-output modeling systems include IMPLAN, RIMS II, and REMI. We have worked primarily with the IMPLAN system, which can estimate models and multipliers down to a county level.

Secondary effects of visitor spending are of two types: indirect and induced. Indirect effects are the changes in sales, income or jobs in sectors within the region that supply goods and services to the recreation/tourism sectors. The increased sales in linen supply firms resulting from more motel sales is an indirect effect of visitor spending. Induced effects are the increased sales within the region from household spending of the income earned in the tourism and supporting sectors. Motel or park employees spend the income they earn from tourists on housing, utilities, groceries, etc. These represent induced effects of the visitor spending.

Multipliers capture the size of the secondary effects, usually expressed as a ratio of total effects to direct effects. Total effects are direct effects plus the secondary (indirect plus induced) effects. A sales multiplier of 2.0, for example, means that for every dollar received directly from a visitor, another dollar in sales is created within the region through indirect or induced effects. Multipliers are frequently misunderstood and misused and must be understood and applied with the context of the input-output models from which they are derived. A complete discussion of multipliers is beyond our scope here, but we will attempt to clarify the two most common sources of abuse by introducing the "capture rate" and discussing differences between the basic types of multipliers. Abuses largely come down to what a given type of multiplier should be multiplied by.

Multipliers should generally NOT be multiplied by total visitor spending. A sales multiplier is multiplied by a change in final demand within the region to yield the total change in sales including direct, indirect, and induced effects. Due to the way that input-output models are structured, all visitor spending does not accrue to the region as final demand. The primary problem is with retail purchases of goods. For goods that are manufactured outside of the region, only the retail margin and perhaps some portion of the wholesale and transportation margins appear as final demand for the region. The cost (producer price) to the retailer or wholesaler of the good itself leaks immediately out of the region's economy. The capture rate measures the portion of visitor spending that accrues to the region as final demand. Only the spending that is "captured" by the local economy should be multiplied by a sales multiplier.

An example should illustrate. Suppose a tourist purchases a camera for $100 while on a trip to the region. Assume the retail margin is 30%, or $30. Assume the wholesaler and shipper reside outside the local area, as does the company that manufactured the camera. The direct effect or final demand change in the local region is only $30, the other $70 immediately goes outside the region to cover cost of the good and shipping and wholesale. The $30 that does accrue to the region is placed in the retail trade sector. The input-output model examines the businesses that the retail store buys goods and services from to estimate indirect effects and uses the portion of the $30 that goes to wages and salaries of employees to estimate induced effects. Assume that a gross sales multiplier for the retail trade sector including both indirect and induced effects is 2.0, i.e., every dollar of sales in retail trade creates another dollar of spending through secondary effects. Notice that the total impact on the region is not two times the original $100 in spending, but instead two times the $30 captured by the local economy = $60. We get the correct result if we multiply visitor spending times the capture rate times the sales multiplier. An adjusted or "effective spending multiplier" equal to the capture rate times the sales multiplier can be multiplied by visitor spending to yield the correct impact.

Besides sales multipliers, one can also produce income and employment multipliers. There are two quite distinct kinds of income and employment multipliers. Ratio type multipliers like the sales multiplier, are simply the ratio of total income (or jobs) to the direct income (or jobs). These multipliers should be multiplied by the direct income or jobs to yield a total. Keynesian income or employment multipliers (also called response coefficients) are ratios of total income (or jobs) to direct sales. Keynesian multipliers estimated from an input-output model must be adjusted by the capture rate before multipliying them times visitor spending.

COMMON ERRORS IN RECREATION AND TOURISM ECONOMIC IMPACT ANALYSIS

1. Confusing economic impacts with benefits to users : economic impact assessments focus on actual flows of money into a region as contrasted with economic valuation or benefit-cost studies that generally measure willingness to pay and consumer surplus. Economic impact analysis measures benefits to the region, not the benefits to the visitors themselves.

2. Not clearly defining the action for which impacts are desired. Economic impact tools are designed to help evaluate policies and programs based on their contributions to a region's economy. In a program evaluation context, the program or action being evaluated must be clear in order to properly attribute economic changes to the given program. Even when evaluating the impacts of recreation or tourism in a broad sense, one must define the scope of activity to be included. For example, is tourism defined as trips of 100 miles or more, is the impact just of visitor spending or does it also include capital expenditures, construction, and government spending, are seasonal residents counted as tourists, business travelers, those visiting friends and relatives?

3. Not defining an appropriate impact region and separating "new" dollars from outside the area from local spending. One must specify the region for which impacts are desired. The region defines which visitors are considered local or tourists, which spending should be included (only expenses made within the study region), and which primary and secondary effects should be counted (sales of businesses within the study region).

4. Using inappropriate multipliers. There is much confusion and misuse of economic multipliers in recreation and tourism studies. Most studies should likely avoid multipliers altogether and focus on obtaining good estimates of visitor spending and its direct effects on the region's economy. Multipliers should not be taken from secondary sources or previous studies and applied to new situations without a good understanding of what they represent and how they should be used. The most common mistakes are applying statewide multipliers to local regions, and applying ratio type sales multipliers to visitor spending.

5. Mismatch between spending and visit information. Visitation and spending are frequently measured in different units. A common way to estimate total spending is to multiply the number of visitors (or visits) by an average spending per visitor (or visit). The problem is that estimates of the average spending frequently comes from surveys that may measure spending on a per person, per party, per day, per night, per year or per trip basis. Visit estimates may be derived from axle counts, entrance fees, occupied room nights or other sources, which may double count visitors and involve different units. While theoretically one may convert between units using party size, length of stay and other parameters, there are a host of complicating factors such as how children , multiple vehicles, multiple spending units in a group, and re-entries to parks are handled, just to name a few. Several resource management agencies have traditionally favored a unit called the recreation visitor day (RVD), which is an accumulation of person visits up to an 8 or 12 hour day. Using a 12 hour standard, one visitor day could be one person for 12 hours, two for six hours or 12 for one hour. These scenarios would involve completely different patterns of spending making the RVD a rather useless unit for economic analysis. When visits are reported in RVD's, one must generally work back to figure out how many person or party trips to the area are involved, as spending is generally repored on a trip basis, not an hourly basis.

6. Not margining goods that are purchased or otherwise accounting for spending that is captured by the local region. Not allvisitor spending is captured by the local economy. First, one must be careful to exclude spending made at home, on route outside the region, or on sidetrips or other stops outside the designated region. Conversely, pre-paid lodging and credit card purchases should be included if they accrue to businesses within the region. Airfares and package tour fees are sometimes difficult to allocate to a particular region. A more subtle error is the inclusion of all retail spending, without taking retail margins and omitting the producer prices of goods that are not made locally. Local impacts will be greatly exaggerated if the goods that tourist's purchase are implictly assumed to be locally made. Rarely will the gasoline that tourists purchase be locally refined and except for local arts and crafts and agricultural products, the souvenirs that tourists buy are imported from outside the region.

7. Not isolating tourist spending from local spending. In some cases, local residents may constitute a large portion of the "visitors" to an area or facility. Their spending would not normally be included as "new dollars" to the region for an impact analysis. Most state tourism assessments count all trips over 50 to 100 miles, although the bulk of these trips still come from within the state. Many festivals and events may attract mostly local residents. Individual facilities, parks, and programs will include a certain percentage of local visitors that ideally should be separated out in assessing regional economic impacts. Locals will also contaminate most of the secondary sources of spending/sales, which is why total hotel or restaurant receipts in an area may not be a good indicator of tourist activity. One can, of course, include spending by residents of the region as part of a "significance analysis", but should then interpret the results accordingly.

A bulletin on concepts of economic impacts of tourism is available for downloading in PDF format. This bulletin is aimed at tourism industry managers and analysts. Economic impact concepts and methods are introduced along with the key issues that arise in assessing the economic impacts of tourism. Follow this link to download PDF files.