Economic Impact Analysis (EIA) is an evaluation tool used to support the decision-making process in understanding the economic consequences of new policy, project, investment, or event. The primary purpose is to quantify, analyse and trace the total economic activity generated by the project of interest, usually from a local or regional perspective.
This form of EIA utilises input-output relationships between the many industries in a regional economy. Input-Output models typically measure three types of economic benefits:
EIA valuable for demonstrating the nature and significance of economic contributions from a project and how money cycles through each sector of the economy. However, it cannot say how much ‘better off’ society would be with the project, compared to an alternative investment. To answer that question a Cost Benefit Analysis is required.
Synergies maintains input-output (I-O) models for most regions of Australia. I-O models are also useful in investigating relationship between sectors within an economy using backward and forward linkages:
Changes in the output of sectors with strong backward and forward linkages will have the greatest relative impact on the rest of the economy. Sectors that have strong forward linkages are affected to a greater extent by changes in the general level of local economic activity.
EIA is appropriate for project investments or policy changes that are unlikely to affect the structure of the economy or trigger growth that exceeds existing regional supply capacity.
For larger changes, that have a significant impact on the economy by changing the flows of goods, services, and labour, Computable General Equilibrium (CGE) modelling is the preferred approach as this tool is capable of accounting for resource constraints in the economy, which may occur with very large investments or structural policy changes.
CGE models are used to consider the whole-of-economy effects that might arise from policy change, events or shocks. CGE models are representations of an economy (e.g. at regional, state, or national level). They contain considerable industry detail (up to 120 industries and commodities), capture price effects and allow sophisticated analysis of fiscal, demographic and economic impacts.
The model can be run in two modes: Forecasting or policy (impact) analysis.
In forecasting mode, the model is used to project a future economic growth path. The high level of industry detail means that structural changes are able to be captured. This is turn can be used to estimate impacts on prices and quantities that have an industrial determinant. For example, CGE models have been used to forecast electricity demand, greenhouse gas emissions and changes to employment and transport demand.
In policy (impact) mode, the model is used to examine the effects of an economic shock or change. The impacts are generally estimated in relation to a counter-factual and account for supply (labour, capital and land) and fiscal constraints.
