Input-Output Models for Impact Analysis: Suggestions for Practitioners Using RIMS II Multipliers Rebecca Bess 65 th Annual AUBER Fall Conference Indianapolis, IN October 8-11, 2011

2 Outline of Today’s Talk ▪ Input-output models ▪ Key assumptions ▪ Information required from users ▪ Multiplier selection ▪ Common mistakes

I-O Multipliers ▪ Similarities to macroeconomic multipliers  Initial change leads to additional spending  Leakages (imports, saving, taxes) ▪ Differences from macroeconomic multipliers  Measured inter-industry relationships  No supply constraints ▪ Similar results between models more likely when resources are “slack” ▪ Advantages of industry-level detail 3

Literature Review ▪ Macroeconomic multipliers  Kahn (1931); Hall (2005) ▪ I-O multipliers  Leontief (1938); Isard (1951); Richardson (1985); Beemiller (1990) ▪ Uses and misuses of multipliers  Coughlin and Mandelbaum (1991); Mills (1993); Hughes (2003); Grady and Mullen (1988); Harris (1997); Siegfried, Sanderson, and McHenry (2006) 4

Intermediate inputs are commodities purchased by industries Value added is the income earned in production, including labor earnings Total gross output = Intermediate Inputs + Value Added GDP = Σ Value added = Σ Final use; GDP ≠ Total gross output 55 National Use Table

6 Key Assumptions ▪ Backward linkages ▪ Fixed production patterns ▪ Industry homogeneity ▪ Fixed prices and no supply constraints ▪ Local supply conditions ▪ No regional feedback effects

77 Information Required from Users ▪ Final-demand change  Expressed in terms of output, earnings, or employment  Changes in demand from final users  Personal consumption expenditures (C) ; Investment in new construction, equipment, software (I); Government (G); Exports (X) ▪ Final-demand industry  Detailed or aggregate  Consider project phases ▪ Final-demand region  Purpose of the study  Area of interrelated economic activity  Location of industries supplying direct inputs  Where most new employees will reside

88 Multiplier Selection

99 Common Mistakes ▪ Not taking offsets into consideration ▪ Confusing gross output with regional GDP ▪ Confusing changes in investment with intermediate purchases ▪ Using final-demand changes in purchaser prices ▪ Using a Type II multiplier when a Type I multipliers is more appropriate ▪ Averaging or summing multipliers ▪ Using multipliers to measure industry contributions

10 Further Suggestions ▪ Avoid using multipliers to estimate the impacts of:  single events taking place over a short period of time  an industry’s contribution to the economy, especially one of the economy’s largest industries  changes large enough to affect the structure of the economy

11 Thank You Rebecca Bess RIMS II Section, Regional Product Division U.S. Bureau of Economic Analysis Phone: