¿ .^ REGIONAL

DEVELOPMENT

AND PLAN

EVALUATION

The Use of

Input-Output

Analysis

U.S. Department

of Agriculture

Economics,

Statistics, and

Cooperatives

Service

Agriculture

Handbook

No. 530

*^m fi>
REGIŒAL DEVELOPMENT AND PLAN EVALUATION: TOE USE OF INPUT^OUTPUT ANALYSIS.

By Robert McKusick^ Nelson Bills, Richard Clark, Clifford Jones, Robert

Niehaus, Charles Paliner, Sterling Stipe, John Wilkins, and Linda Zygadlo.

Natural Resource Economies Division; Economies, Statistics, and Cooperatives

Service; U.S. Department of Agriculture. Agriculture Handbook No. 530.

ABSTRACT

The Water Resources Council's Principles for Planning Water and Land Resources

and Standards for Planning Water and Land Resources require multiple objective

planning and evaluation of natural resource use. Within that framework, a

regional developnent account must be prepare:3 for each alternative plan considered in the plan evaluation process. This report examines the uses and

limitations of input-output (I-O) analysis in the formulation of the regional

development account. The information needs of planners and economists evaluating plans in tenns of regional develc^xnent are identified and I-O's capability to provide some of these data is exaiTiined. An application section

demonstrates the correct procedures for using regional input-output techniques

in the estimation of secondary market impacts of plans, and identifies the

limitations of using multipliers in isolation from the I-O model. The report

enphasizes evaluating the feasibility of resource plans for a regional econoiry,

as opposed to project justification.

Key Words: Input-output, Regional development and planning. Water Resources

Council's Principles and Standards, Multipliers

This report is based on work done by the Economics, Statistics, and Cooperatives

Service as part of its program of planning assistance to the Soil Conservation

Service in the small watershed and resource c:onservation and development

programs. The cooperation and financial supjport of the Soil Conservation

Service in this study is greatly appreciated.

In addition to the Soil Conservation Service, we wish to thank the many

individuals who participated in seminars and provided review comments throughout the study; in particular, Harry Ayer, Neil Cook, Clark Edwards, Roy Gray,

Chuck Handy, Norm Landqren, Jim Sayre, Gerald Schlüter and John Stierna.

Finally we would like to recognize the excellent work of Linda Stallard in

table formating, proofing, and typing the rejDort.

Washington, D.C. 20250 May 1978
PREFACE

This study examines the use of input-output (I-O) analysis in the plan evaluation process for water and related land resources by the Federal Government.

An 1-0 model depicts the supply and demand relationships of an economy in

equilibrium and estimates the indirect econonic changes which would occur if

a plan were inplemented. This study examines the apprcpriate use of 1-0

models in U.S. Department of Agriculture (USDA) planning efforts, and presents

applied examples of the use of the 1-0 multipliers and models consistent with

the Water Resources Council's Principles for Planning Water and Land Resources

and Standards for Planning Water and Land Resources! Although the original

objective of the study was to concentrate on 1-0 multipliers, models, and

application, the researchers first determined the economic information needs

associated with regional development, and assessed quantitative methods used

to develqp this information.

1-0 analysis is a widely used tool; however, multipliers are frequently applied

incorrectly. This study should be useful to researchers currently using 1-0

analysis as well as individuals with very limited exposure to 1-0 techniques.

While the study should be useful to planners at the Federal, State, and local

level dealing with regional planning, it is specifically oriented to USDA

economists formulating and evaluating plans under various USDA resource

programs.

This study and report were funded by USDA's Soil Conservation Service. A team

of economists from the Economics, Statistics, and Cooperatives Service, Natural

Resource Econonics Division, prepared this report. Although the final report

is a total team effort, each chapter and appendix had principal authors. They

are listed in the Table of Contents. Robert McKusick, project leader and

editor, and Linda Zygadlo coordinated this report.
HIGHLIQÎTS iii

CHAPTER I. INTRODUCTION—Robert McKusick 1

Purpose and Objectives 2

Scope of the Study 3

CHAPTER II. REGIONAL DEVELOPMENTV-Nelson Bills, Linda Zygadlo 4

The Region as a Unit of Study 4

Stages of Grovth 6

Economic Base Theory Critique 8

CHAPTER III. REGIONAL DEVELOPMENT AND PLAN EVALUATIGShLinda Zygadlo, Robert Niehaus 13

Information Requirements of Plan Evaluation 13

Secondary Market Inpacts 14

Secondary Market Effects for the Region and Nation 14

Evaluation Procedures and Regional Development 16

Externalities and Secondary Market Effects 20

Enpirical Estimation of Secondary Market Effects 21

CHAPTER IV. I-O CONCEPTS—Charles Palmer, Nelson Bills, 22

Robert Niehaus

The Basic 1-0 I^fodel 22

1-0 Multipliers 30

The Region and 1-0 Analysis 32

CHAPTER V. THE USE OF I-O ANALYSIS IN PLAN EVALUATION—

Sterling Stipe, Richard Clark, Clifford Jones 36

An Overview of the I-O Tables 36

Estimating Direct Inpacts 40

Use of I-O Models for Projections and Determining

Planning Strategies 63

CHAPTER VI. GENERAL APPLICATION OF I-O ANALYSIS AND ITS

MULTIPLIERS—John Wilkins 65

Preparing Project and Program Benefit and Cost Estimates

for Multiplier Analysis 65

Multiplier Use in Functional Conponents 76

Other Applications of Multipliers and Coefficients 84

11
CHAPTER VII. COíCLUSIONS AND RECOMMENDATIONS—Robert McKusick,

Linda Zygadlo 85

Conclusions 85

Recxxnmendations for Future Research 87

BIBLIOGRAPHY 89

APPENDIX A: GLOSSARY OF TERMS-—Clifford Jones, Sterling Stipe 93

I-O Definitions 93

Definitions of Terms Used in Plan Fonnulation 99

APPENDIX B: NCNSURVEY ESTIMATIŒsf TECHNIQUES FOR SUBSTATE

RBGIŒAL INTERINDUSTRY MODELS—Robert Niehaus 100

An Overview of the Estimation Process 100

Conclusions 104

APPENDIX C: DISPLAY OF IMPACTS OF PLAN IN PRINCIPLES AND

STANDARDS ACCOUNT—Clifford Jones, Sterling Stipe 105

HIGHLIGHTS

Ihis study focuses on the use of input-output (IHD) analysis to estimate the

direct and indirect econonic impacts on a region resulting fron the implementation of a natural resource plan. Although 1-0 analysis has some limitations,

it can provide detailed and reliable estimates of changes in a regional economy. 1-0 analysis is frequently underutilized and, more seriously, misused.

Sector multipliers are often applied when the use of an 1-0 matrix would have

provided a more detailed indication of plan effects on the regional econcny.

Multipliers are often applied to incorrect dollar values, resulting in inaccurate estimates of plan impacts on the local economy. The concepts underlying

I-O analysis must be understood to use the tool properly.

Other limitations of the I-O approach in determining plan impacts on regional

development should also be kept in mind. Econonic analysis is only one input

into the natural resource and regional decisionmaking process. There are

legal, social, engineering, political, and ecological factors to consider. One

should remember that after economic impacts have been estimated, they, along

with other factors, must still be evaluated to determine whether they meet the

overall planning objectives.

The study concludes that:

. Regional development should be included as an optional planning

objective if regional objectives differ significantly from national

objectives and if planning under national objectives would not solve

regional problems and needs.

iii
If regional development is included as a planning objective, impacts

of these plans on national econonic development efficiency must be

displayed so that local and national decisionmakers can compare costs,

benefits, and other regional and environmental tradeoffs.

This report should be used in conjunction with the Water Resources

Council's (WRC) Guideline 5 Regional Multipliers report to provide

direction and caution in the use of multipliers. Resource planners

and econonists need additional education in the application and use

of I-O models and multipliers.

I-O models have advantages over multipliers in project and program

evaluation and plan formulation because regional development

strategies can be developed and evaluated. Multiplier analysis

provides only aggregate effects, whereas an I-O model identifies

sectoral changes.

Conventional I-O techniques can be used to study regional develc^xnent

strategies and inpacts of resource plans. Hcwever, meaningful application depends on reliable estimation of structural relationships

between sectors of an economy and a careful study of direct project

and program effects and conversion of these effects into final demand

changes on an industry-by-industry basis.

There is a need to evaluate and conpare alternative plans (those aimed

at national economic development, regional development, and environmental quality) at the regional level to determine the significance

of a highly concentrated economic base, high export leakages, major

industrial shifts, and different trade patterns.

I-O analysis should continue to expand into other areas such as energy,

capital, pollution, and pesticides.

I-O techniques and application should be inproved in areas such as

nonsurvey techniques to develop small area models from national and

regional models; and national interregional models to link existing

regional models to account for iitport/export flows in, and leakages

fron, small areas.

There is a need to strengthen the data base used in I-O models,

especially inport/export data; data which relates final demand

estimates to natural resource development, conservation, and management; and changes of technical coefficients over time.

IV
REGIONAL DEVELOPMENT AND PLAN EVALüATIOSi:

THE USE OF INPUT-OUTPUT ANALYSIS

CHAPTER I. INTRODUCTION

by Robert McKusick

The problem of hav to quantify and plan for regional ecxDnomic qrcMth and

development has been a continual concern of local/ State^ and national

planners. This concern has been renewed in the water and land resource area

in the last 5 years with the adoptiai of the Water Resources Council's (WRC)

Principles for Planning Water and Land Resources and Standards for Planning

Water and Land Resources (referred to in this report as the Principles and

Standards) (11) (58) (59) and the recent WRC publication of Guideline 5

RegionallMultipliers (3Î) (6£).* The Principles and Standards require a

regional account display of tradeoffs of alternative plans based on national

economic development and environmental quality objectives. Regional development is not used as an objective for developing plans.

There is a potential conflict in the requirement that regional plans be based

on national economic development and environmental quality objectives which do

not recognize regional development strategies and only display regional development impacts as an account entry. One of the purposes of Federal land and

water programs is to solve regional resource problems and develcp locally

acceptable plans. Ihe planning and evaluation criteria appear to be in conflict with the purpose.

Most regional. State, and county planners are interested in local socioeconomic

evaluation and potential impacts of resource programs and plans. Local participants, planners, and decisionmakers need information on costs, benefits, and

other regional and environmental tradeoffs before recommending and implementing

a plan. This information cannot be just a localized national economic development account display, but has to reflect the regional econony and the interindustry and intraindustry flew of goods and services. Enough information has

to iDe developed so that alternative regional development strategies can be

prepared. TWo major types of information are necessary: reliable estimates

of structural relationships among sectors of an econo^my and direct and indirect

economic innpacts of projects and programs. Pro)gram and project activities

have to be translated into shifts in final demand on an industry-by-industry

basis.

Input-output (I-O) techniques are a useful method of estimating secondary

economic effects of small watershed projects; resource, conservation, and

Underlined numbers in parenthesis refer to citations in the Biblicgraphy,
development project ineasures; river basin plans; and corponents of other

regional development plans. While most resource agency administrators^

planners, and researchers are familiar with the multiplier concept, there is

much disagreement on the appropriate use, interpretation, and generation of

multipliers. Recently, there has been a trend away fron using the I-O model

and table, and tcward using multipliers in isolation fron the model.

The need to appraise and evaluate I-O techniques is more critical given the

recent WRC release of Guideline 5 Regional Multipliers (60) which is to be

used for water and related land use planning. Although the publication

identifies gross output multipliers by Bureau of Economic Analysis (BEA) areas,

it does not relate project or program outputs to the multipliers and it lacks

applied exanples. There is also the potential problem of not recognizing the

limitations of using multipliers in isolation fron the 1-0 model. This report

should be used in conjunction with the WRC "BEA Multiplier" approach to give

direction and cautions in the use of multipliers.

The increased use of the gross multiplier approach, together with the dropping

of regional development as an objective in the Principles and Standards and

the tendency of the Office of Management and Budget to ignore regional development analysis as a criteria for funding projects, has put regional development

in a minor supporting role in the Principles and Standards. Regional development will most likely not becx^ne a planning objective in the near future given

the results of the Section 80 study (57). The Section 80 study investigated

the possibility of including regional economic development as a chief planning

objective. The stuoSy recxommended that the present two objective framework

(national ecxDnoxnic development and environmental ojuality) of planning be maintained. Most national planners treat regional development as a residual

accoxint, with primary emphasis on the national economic development objective.

If regional plans are to be inplemented and related to regional problems, preferences, and public involvement, then the regional development accoxint entries

have to be a part of the economic analysis of plan feasibility, and not an

afterthought to justify a national economic development objective and plan.

Purpose and Objectives

This report discusses and evaluates a general methcxî for estimating the secondary market iDenefits and costs to a region of a public natural resource plan or

project. And it evaluates the appropriate uses of 1-0 models in USDA planning

and evaluation efforts.

Specifically, the report will:

1. Identify the general nature of regional development.

2. Discuss the basis for evaluating the secondary market

effects of public resource plans on regional development.
3. Reviev and evaluate the WRC's Principles and Standards and

USDA's guidelines^ particularly as they relate to secondary

rnarket benefits and costs and regional develc^^ment.

4. Outline the key features of I-O analysis, including its

application to regions.

5. Examine procedures for using regional 1-0 techniques in the

estimation of secondary market effects of plans.

6. Develop hypothetical models to demonstrate these procedures.

7. Identify future research needs and recommendations.

Scope of the Study

The evaluation criteria and procedures presented in this report are applicable

to a wide range of resource development plans and evaluation. Of particular

interest are water and related land resource programs and projects which involve structures for flood control, irrigation, drainage, regional and rural

canmunity service, land treatment, recreation, municipal and industrial water

supply, water quality, power, and navigation. The report orphasizes the evaluation and feasibility of resource plans for a regional economy, as opposed to

project justification.

This study should aid economists and planners estimating secondary benefits and

costs, and therefore inprove planning for regional development. 1-0 analysis

is used to measure changes in the level and composition of market econonic

activity that stem from and are induced by the regional plan. The 1-0 approach

should encourage the analyst and planner to consider the regional econory as a

coiTplex entity of interdependent institutions, industries, and social and

econcmic forces.

The evaluation of public natural resource plans involves many other issues and

informatic«i needs, which are just as important as the appropriate measure of

secondary benefits and costs. These include nonmarket inplications of the plan,

appropriate length of the planning period, choice of a discount rate, commodity

output and resource pricing, and the social value of project or program outputs.

This study addresses only a part, although an important part, of the total

regional planning and evaluation process.

Appendix A lists and defines a number of terms commonly used in 1-0 analysis

and in development plan formulation. Appendix B discusses the estimation of

small area and substate models from State and national models. Appendix C

shows exarrples of the impacts of regional plans in the Principles and Standards

accounts.
CHAPTER II. REGIONAL DEVELOPMENT

by Nelson Bills and Linda Zygadlo

This chapter traces briefly the evolution of the region as a unit for study^

highlights the public's longstanding interest in economic growth and development, discusses the theoretical concepts conmonly used to study regional

growth, and enphasizes the limitations associated with these concepts. Distinctions between regional growth and regional development will become clear.

The Region as a Unit of Study

Growth (or the absence of it) has been one of the Nation's oldest concerns,

but the units of observation used for study and policy prescription have often

been at one extreme or another. On the one hand, ideas about growth were related to individuals or to single firms. On the other extreme was concern

with the growth of broad national aggregates such as total enployment, total

consumption expenditures, or total investment expenditures. National aggregates provide useful descriptions but they mask changes in different regions

of the country. Analysis and policy prescriptions based on the intermediate

unit of observation—the region, the community, or the small area—have

emerged far more slowly.

The geographic area included within a region depends on the range and type of

questions under evaluation. A region may be defined as a small rural community

and its service area, a large, densely populated metropolitan area, or at the

far extreme, a massive region encompassing several States.

Criteria for delineating a region are frequently complex. The region can be

defined on the basis of a single criterion resulting in either a physical or

geographic region, an economic region, a social or cultural region, or a

region delineated on the basis of jurisdictional boundaries. Alternatively,

the region can be defined in terms of any ccinbination of the above criteria.

The concept of the region as a method of classification has evolved through

two distinct phases reflecting economic advances from a siirple agrarian economy

to a corplex industrialized system (15). The first phase saw the formal region

concerned with uniformity and homogeneity of selected criteria. In the early

definition of formal regions, the criteria were predcxninantly physical.

Recently, economic and even social and political criteria have found widespread

use. The more recent phase of classification resulted in the development of

the functional region concerned with interdependence and defined on the basis

of functional coherence. The functional region is generally composed of

heterogeneous units such as cities, towns, and villages which are functionally

interrelated.
Thus, regions may be formal or functional based on one or more criteria. Most

importantly, for a regional delineation to be useful to economic planners and

other social scientists, it must be large enough to be an economic unit—an

area with economic relationships and interdependencies between industries—but

small enough to shew specific development problems. A 15,000-acre rural area

consisting of two gas stations, a church, and numerous dairy farms cannot be

considered an economic unit.

Viewed simplistically, formal hydrologie boundaries appear to be the obvious

regional delineation for water resource planning; however, hydrologie boundaries generally do not make economic sense. Econonic iirpacts usually cannot

be analyzed within a hydrologie framework since economic interrelationshipr

and interdependencies do not correspond to physical hydrologie boundaries.

Political boundaries—counties, for exanple—can be just as artificial as

hydrologie boundaries for the purpose of analyzing econonic interdependencies

or relationships. But, a formal regional delineation on the basis of jurisdictional boundaries does have sane practical advantages. For exanple, data

are generally collected on a county basis. One of the most difficult tasks

of regional analysis is to arrange these secondary data to correspond to the

desired functional boundaries with reasonable accuracy.

Regional delineations based on jurisdictional boundaries can also work to the

advantage of plan inplementation. Local sponsorship of a project often involves an established political unit. Within this formal framework, program

output can more readily be tied into other services and administrative

responsibilities.

Several years ago, concerted efforts were undertaken to make the concept of

a functional economic area cperational. The rationale for the efforts are

typified by Fox (13) who asserted that, "The major problem of rural society

in the United States is our institutionalized belief that a rural society

exists and can be manipulated successfully apart from society as a whole."

According to Fox, many conventional dichotomies—agricultural and nonagricultural, rural and urban—are more confusing than useful. Such categories

frequently obscure the fact, for example, that rural people include full and

part-time farmers, the retired, commuters, and local businessmen providing

services to then. Furthermore, all these groups are highly dependent upon

industrial urban centers.

Efforts have been made to canbine political jurisdictions—^most often

counties—to delineate regions that more closely coincide with functional

econcmic areas. IXiring the late I960's and early 1970's, BEA delineated 173

multicounty economic areas throughout the Nation to be used for the OBERS

projections; 1/ these functional areas have been designated as BEA economic

V The OBERS projections were developed for the Water Resources ODuncil

to be used in comprehensive planning for the use, managerrent, and developinent

of the Nation's water and related land resources. The OBERS program develops

and maintains projections of population, economic activity, and land use for

the Nation and its geographic subdivisions.
areas. Central place theory provided the conceptual basis for the delineation

of the functional multicounty areas, generally using Standard Metrcpolitan

Statistical Areas (SMSA's) designated b^ the Office of Management and Budget

as the centers. Ihe BEA functional economic area identification was one of the

first nationwide multicounty delineations. It has been widely used in ccojunction with water resources planning.

Stages of Growth

Regardless of one's definition of a region^ it is probably too ambitious to expect to have a theoretical approach that would be suited for all regions at all

times. One of the oldest ideas about regional growth is that a regicn typically passes through stages of grcwth. 2/

The first stage is largely one of self-sufficiency. Virtually all production

is based on natural resources, small amounts of capital investment are made,

and there is only a limited amount of trade between individuals or businesses

or regions. Ihis stage can be identified early in the history of most U.S.

regions.

Several stages can be constructed to follcw the first stage. An intermediate

stage would certainly involve greater specialization in production and grcwth

in cash markets to facilitate trade. Greater trade volume also inplies important inprovements in transportation and the emergence of manufacturing. Often,

manufacturing activities could be closely tied to the region's natural resources (processing of locally produced farm commodities, for example). More

and more capital investment would characterize a region at this stage. Some

local industries would decline while income and ernployment generated in manufacturing, trade, transportation, and the provision of various kinds of personal

and professional services would greatly increase.

The idea of grcwth stages is still important, though the United States as a

vrtiole is clearly in a sophisticated or late stage of grcwth. Its importance

stems from the fact that we find regions and localities which are at different

stages on the gravth spectrum. Theories and models we use to study regions

ought to be applied with these differences in mind. Some of the most inportant

ideas about regional growth have evolved from economic base theory. These

ideas provide much of the theoretical support for the procedures discussed in

this report. Consequently it is necessary to discuss the adequacies and

inadequacies of econonic base theory at some length.

Economic base theory takes into account the fact that grcwth and develcpnent

in a region result in increased reliance upon specialization in production and

trade. Trade—with when and upon v^at terms—is a convenient point of d^arture for a theoretical framework within which one can study regional grcwth

and development.

2/ We are indebted to North (39^) (4£) for much of the modem literature on

regTonal growth stages but the general idea can be traced much further back in

economic literature. Although the frame of reference was the entire American

economy, these ideas were elaborated upon in the early 1800's. (4)
EcxDnanic base theory suggests that all economic activity (all production of

goods and services) within a region can be separated into two categories—

autonomous and nonautonomous ( 24 ^ 32.' i£) • ^ Nonautonomous production is

distinguished by the fact that the products are delivered to consumers (both

firms and households) within the region. On the other hand^ autonomous production by definition includes production which is put directly in the hands

of consumers outside the region.

The distinction between the above two kinds of production seems to be consistent with the notion that some producers realize returns to scale such that

they can profitably produce at levels which exceed the demand in local markets

(32). In other words^ it can be presumed that the regicn or locality enjoys

a comparative advantage relative to other regions in sane lines of production.

The region does some things well enough to participate in national or even

international markets.

Base theory goes on to suggest that regional growth is ordinarily influenced

by deliveries of locally produced goods and services to external markets.

Exports—deliveries to external markets—are the prime movers of the local

economy (48). 4/ All other econonic activity, endogenous in the sense that

production serves local markets, is considered to be passive in the local

growth process. Either scale economies available locally do not allow profitable participation in export markets or possible export markets are too small

to allow local producers to coitalize on the econonies attendent to largescale production.

At any rate, production solely for local markets is thought to be dependent on

exporting industries. Nonexpert activity owes its economic existence to interdependencies or linkages to export activity. Ihese linkages could take the

form of providing goods directly to local consumers (households) or providing

raw materials and/or semifinished products to firms which export to the rest

of the world.

Base theory also implies that a change in the volume of exports has a

generative or multiplier effect on the local econory. The receipts from increased export sales are used in part to purchase local (endogenous) goods and

services such as raw materials, haircuts, and so on although some of the receipts are leaked away through purchases (imports) fron other regions.

Mechanically, the multiplier relationship takes the form of a base/service

ratio:

3/ Many other terms besides autonomous and nonautonomous have found their

way into the literature. The terms internal-external, exports-services, and

endogenous-exogenous also receive considerable use in discussions of base

theory.

4/ An exanple of an export business could be a food processing plant exporting its products outside the region, whereas the local grocery store is a

nonexpert business.
The ...ratio purports to descrite either (a) the proportion

between total enployment in a city's fcasic or export activities

and total enployinent in its service or local activities or (b)

the proportion between the increase in enployment in a city's

basic or export activities and the increase in its service or

local activities (24).

For example, if export and service employment in a region were 1,000 and 2,000,

respectively, then the base/service ratio would be 1,000:2,000 or 1:2. Alternatively, an additional orployee producing for export markets might create or

support two jobs in the local service sector, in vtiich case the base multiplier

would te ratio 3:1. That is, a total of three additional jobs would te created

for each additional job to produce exports.

The initial experimentation with conputations of base multipliers tegan in the

1930's. Several hundred economic tese studies have teen undertaken since that

time. 5/ Some have teen done for cities and sane for rural areas. All have

involved estimates of the base multipliers.

Econanic Base Theory Critique

Studies involving the identification of tesic and service activities and the

computation of tese/service multipliers have teen soundly criticized by economists, geographers, planners, government officials, and laymen. 6/

Industry Mix

One of the more consistent lines of criticism has teen that tese studies perform well in description but poorly in prediction (2^). Base/service classificaticn is a useful way to characterize or descrite a regional econary. But,

it is not certain that a single tese/service ratio can yield a useful estimate

of the multiplicative effects associated with a change in export activity. In

practice, a region or locality protebly has several industries that participate

in export markets. It is also likely that each industry has particular ties or

linkages to local service industries. It follcws that each industry exerts a

particular multiplier effect on the local economy. An econanic tese study and

a tese multiplier, on the other hand, is computed to reflect the average response to a change in deliveries to export markets. All exporting industries

are treated equally. Predictive results can te poor, therefore, simply tecause

e3Ç>ort expansion is sometimes concentrated in a few industries that deviate

from the average.

5/ An exhaustive list of such studies is teyond the sccpe of this report.

Urban planners, however, made many of the earlier enpirical studies. Studies

done in Detroit (£), Arlington County, Virginia (21^), and Oshkosh, Wisconsin (1)

are representative of this work.

6/ Richard B. Andrews wrote a series of articles dealing with the adequacies

and inadequacies of economic tese studies. His work appears in several issues

of Land Economics in the 1953-56 period. Pfouts (43) collected these articles.
Consider a locality wherer on the average, each additional job involving

production for export markets creates tv/o new jobs in local service industries.

The base/service ratio is 1:2. If, in this exanple, the new production for export actually involved agriculture, the nultiplier effect in the local area

could be greater or less than average depending upon hcM dependent farmers are

on local services relative to the average of all industries producing for export markets. If fambers are more dependent on local services than other industries, the multiplier would exceed the average. Perhaps it would be 1:3.

If, on the other hand, fani^rs import most of their services (hired labor,

seed, fertilizer, fuel, and so on) frcxn another locality, the multiplier would

be belcM the industrywide average. Perhaps it would be 1:1. These differences

among local industries can be determined only with an analytical procedure

which allows each industry to be treated separately.

Sources of Autonomous Demand

Criticism has also been leveled at the basic assumption underlying base theory

itself. Tiebout has argued that the concept of export base is a gross oversinplification for e^^laining grcwth:

There is no reason to assume that e5Ç)orts are the sole

or even most inportant autonomous variable determining

regional income. Such other items as business investment,

government expenditures and the volume of residential construction may be just as autonomous with respect to regional

income as exports (49, p. 257).

In many regions, therefore, there would conceivably be a significant period of

time when export sales were stable while pronounced increases in local income

and enplcyment occurred. The triggering mechanism for income and erployment

e5$)ansiai could come from several other sources of demand for locally produced

goods and services.

One of many examples could be residential construction. Several housing starts

in a locality could enploy local people and greatly increase the sales volume

of local businesses who service the construction industry. The local economy

experiences gra//th under these conditions even though exports of agricultural

products, manufactured goods, and so on do not increase. A regional model

flexible enough to consider several sources of autononous final demand for a

region's products would be a marked inprovement on the conventional base

multiplier.

A Region's Capacity to Supply Goods and Services

For all practical purposes, the antithesis of the economic base hypothesis is

simply that the forces that ordinarily influence regional grcwth and develcpment operate within the region rather than from without. That is, autcnoroas

demand for local production—outside forces—could be a factor, but grcwth

might also be influenced by forces at work on the supply side of the equation.

How can growth occur unless the region increases its capacity to supply goods
and services? The region either obtains more resources (labor and capital, for

exanple) to work with, or the productivity of existing resources (through new

technology, for exanple) somehow increases. If so, a theoretical aj^roach

which dwells upon the growth-inducing effects of changes in donand but largely

ignores factors influencing supply misses the mark to a large degree.

Like most other econonic problens, it is probably true that studies of regional

growth must ultimately involve consideration of demand factors and supply

factors. Demand factors and supply factors work together in determining the

ecoiomic course of a region. It is probably also true that the relative importance of supply factors and demand factors can differ from region to region and

even within a region depending on the time span under consideration.

For exanple, if the time span under study is relatively short (say 1 year), one

can argue that demand factors affecting growth in the region are likely to be

more volatile than sujply factors. Therefore, studies which concentrate on

measuring the short-run effects of changes in demand could logically assume

that the factors underlying the region's ability to supply goods and services

do not change much. On the other hand, studies dealing with regional growth in

the longer term would need to take into account demand for local goods and

services and eventual changes in a region's capacity to supply goods and

services.

The inportance of supply and denand factors can be illustrated once again with

a hypothetical exanple. Consider a locality where agriculture includes production of a feed grain such as corn. The problem could involve an evaluation of

the immediate and longer term effects of additional com production for export

markets (shipments outside the region). An initial increase in com

production—^perhaps under 5 percent—might have a negligible effect on the conditions under which local farmers produce (supply) com for export markets.

Accordingly, the multiplier effects could be quite stable. On the other hand,

an annual increase of 5 percent each year for 10 consecutive years, (a compounded increase of 63 percent) could have pronounced effects on supply relationships for com.

These changes may translate into increases or decreases in the multiplier

effect of local com production. Take, for exanple, fertilizer irputs. A

large increase in com production might require utilization of marginal soils

with lower levels of fertility. A 50-percent increase in com productioi might

consequently require far more than a 50-percent increase in the use of connercial fertilizer. If the additional fertilizer were purchased from a local

manufacturer, the correct multiplier effect would be larger than that inplied

by a model based on relationships that existed prior to the increase in com

production. Such a model would assume that the ratio between fertilizer use

and com production was the same after the change as before.

Conversely, local fertilizer manufacturers might be unable or unwilling to

supply additional products to local com producers. Local producers would turn

to manufacturers outside the region and the correct multiplier effect would be

smaller than that inplied by a model that also assumes a proportionate increase

in local fertilizer purchases as local com production increases.

10
The above exairple illustrates two inportant aspects of regional multipliers.

These analyses eitphasize the response to a change in autonomous demand. In

doing so, regional multipliers assume that purchases from local service industries change in constant proportion to the change in autononous demand. The

com example demonstrates two cases where this assumption would be violated.

The cases are (1) a change in input use and (2) a change in the geographical

pattern of input purchases. A change in input use in the example resulted from

shifts in the physical relationship between soil^ fertilizer, and com production. Several other factors—such as a change in technology or a change in an

input process—could also exert a demonstrable effect on input use. And if input use changes, the multiplier for that industry can change.

The change in the geogr^hical pattern of input purchases illustrated above

stemmed frcxn the inability of local farmers to purchase additional fertilizer

from local manufacturers. Increased fertilizer expenditures leaked away from

the local econony through inports from another region. The multiplier effects

of nev com production are danpened accordingly. Of course, we could find

exanples that run in the cpposite direction. There could be inportant cases of

inport substitution—local producers choose to increase their local purchases

of inputs and substitute them for inported inports. Inport substitution always

enhances the multiplier effect of new production in a locality.

In general, we can say that trading patterns—inports vs. purchases from local

service industries—must remain fixed if the multiplier is to be accurate.

Similarly, we can generalize and say that input use must also be stable if the

multiplier is to be accurate. This latter assunption is tantamount to requiring

that, for any single industry: (1) technology is constant, (2) there are constant returns to scale or volume of production, and (3) the relative prices of

all inputs remain constant.

In some industries, these assumptions could turn out to be too restrictive.

They would be especially suspicious if they were applied in a study dealing

with a longer time period and in an industry experiencing rapid output expansion. Under these circumstances, it is likely that producers will have both

the time and the incentive to make adjustments in the resources used to produce

goods and services. If a cost saving technological develcpment becomes available, producers are likely to adopt it. If the price of any single input increases, they will use less of it and substitute another. If inputs can be

purchased more cheaply outside their locality, they will reduce purchases from

local suppliers. A model or analytical framework which allows some of these

outcones to be anticipated and incorporated into a planning study is a great

inprovement over the traditional economic base multiplier.

Expansion in Autonorous Demand

We have discussed a theoretical framework that concentrates on the secondary or

multiplier effects of increases (or decreases) in autonomous demand for goods

and services produced within a region. The concept of autonomous demand was

elaborated upon so that it became logical to think of several sources or kinds

of autoncxTOis donand. The primary sources were (1) exports to other regions

or to international markets, (2) sales to household consumers residing outside

11
the region, and (3) sales in support of local capital formation (residential

construction, for exairple). 7/ Of these sources, export markets are likely to

predominate in a region because production there is specialized.

In a study of secondary inpacts, it is assumed that these various categories

of demand are receptive to additional local production. 8/ For planning

studies preoccupied with farm and forest products, it is assumed that new local

production will find a ready outlet in export markets. It is also assumed that

the export markets will absorb new products at a stable price. The additional

production will be small relative to total national production. In terms most

familiar to econonists, it is assumed that the demand curve confronting local

producers is perfectly elastic.

Few, if any generalizations can be made about the effect of this assurrption

upon the credibility of the study results. It is important, however, to take

this dimension of the regional plan into account when a study is undertaken.

There will be cases where the climate in export markets does not allow local

producers to deliver additional products at a stable price. In these cases,

of course, the issue of secondary inpacts on the region ma^^ not need to be

raised because primary inpacts themselves may not be forthconing.

7/ The list of autonomous demand sources can vary from study to study. The

sources vary with the preferences of the analyst and the nature of the problem

under consideration.

8/ This topic is comnx:)n in project evaluation and in no way confined to the

regional aspects of a plan. The topic will also be broached in accounting for

the national economic development effects of the plan.

12
CHAPTER III. REGIOÍAL DEVELOPMENT AND PLAN EVALUATION

by Linda Zygadlo and Robert Niehaus

Natural resource planning has long been carried out in the context of regional

development. The original motivation for the passage of the Reclamation Act

of 1902, for exanple, was the development of many parts of the arid western

United States (20), More recently, the Resource Conservation and Development

Program (RC&D) of the U.S. Department of Agriculture 9/ was established to

develcp the natural resources of selected regions and thereby to enhance the

economic opportunities of the pecple of those regions. Develcpment activities

of the U.S. Amy Corps of Engineers, the Federal Pcwer Commission, and the Soil

Conservation Service are all notivated in part by a national interest in the

development of individual regions of the country. This chapter examines the

plan evaluation process as it relates to the goal of regional development.

Information Requirements of Plan Evaluation

The first st^ in this examination is to identify the principal types of information needed to evaluate the regional development implications of a natural

resource plan. The required information is basically of two types: knowledge

of the preferences and goals of the individuals affected by the plan and knowledge of the potential impacts of the plan.

In the broadest sense, the goals of society must be specified in order to

assess whether a plan represents a progression tcward or a regression fron

these goals. Specific goals m^ relate to developing the national or regional

econoTiy, preserving the quality of the natural environment, saving lives,

reducing poverty, etc.

The second type of information needed to evaluate the regional development implications of a plan is knowledge of the potential impacts of the plan. The

specification of goals is crucial in providing evaluation criteria; knowledge

of potential impacts is necessary to relate the plan to those criteria. These

impacts are directly related to the economic base of the region.

The potential effects of a plan m^ be sorted into four principal categories:

(1) changes in market econonic activity resulting fron the plan; (2) changes

in the demographic and social characteristics of the region; (3) changes in the

governmental and legal institutions in the region; and (4) changes in the use

and social value of the region's natural resources.

9/ Authorized under the Food and Agriculture Act of 1962 (P.L. 87-703)

13
Secondary Market Impacts

In order to consider a problan of manageable size/ this report concentrates on

the secondary market effects of a plan. The inportance of these impacts is

that they represent a powerful potential mechanism for the diffusicn of the

effects of the plan throughout the region.

Secondary market effects of a plan are the second^ third, etc., rounds of

economic ripples created fcy a primary inpact on an economy. They may occur in

two ways. First/ they may result fron changes in the output of industries which

supply inputs to the primary inpact activities and to the inplementation of the

plan itself. These are the so-called backward linkages that are induced fcy the

plan. Secondary effects may also tie due to changes in the output of industries

which use the products of primary impact sectors as inputs to their own production processes. This second phenomenon is the forward linkage that stems fron

the inplementation of the plan.

The fcasic concepts involved can be illustrated fcy the sinple diagram shewn here

as Figure 1. Suppose only one activity—agriculture—is immediately affected

by the plan. This activity is considered the primary inpact sector. Any

effects induced fcy the change in agricultural output on the chemical/ machinery/

and other input industries/ and on resources used by these industries/ are backward linkages. Any effects stemming fron the change in agricultural production

on the transportation/ processing/ and nrerchandising sectors/ as well as on

final consunption/ are forward linkages.

Secondary Market Effects for the Region and Nation

Based oc\ our interpretation of secondary market effects/ it is logical to ask

when they are inportant for a region. Resoluticn of this question is always

an empirical issue/ and the answer varies greatly between regions and fcetween

plans. The critical determining factor is the spatial location of the industries and the piiysical and human resources affected fcy the plan. To the extent

that these related industries and resources are located outside the region/ the

predominant portion of any secondary market effects will he felt outside the

region.

At the same time/ two factors indicate potential secondary market effects within the region/ even when the related industries and resources are located outside the region. First/ it is possible that new investment might be induced

in these industries and resources in the region as a result of the plan.

Second/ there may exist trade linkages fcetween regions that would lead to feedfcack effects within the study region as a result of changes outside the region.

From an enpirical point of vieW/ determining the spatial location of present

industries and resources/ and evaluating the likelihood of related investment/

are the most difficult problems to resolve.

While specific regions may ejcperience secondary market effects of a plan/ it

is not clear that these are relevant to the Nation. The secondary effects of

plans are presumed to be negligible from the national point of viev assuming

that: (1) the national econony is operating near full enplqyment of its

14
Backward Linkages Forward Linkages

(ji

Owners

of

productive

resources :

• land

• labor

• capital

^

Input

supplying

industries

^

Primary

impact

activity

agriculture

^

Transportation

processing,

and

merchandising

system

for

food and fiber

w Consumers

w w

Induced By Stemming From

Figure 1, Secondary Market Impact Classification
physical and human resources without inplenenting the plan; (2) resources are

sufficiently nobile; (3) economic decisionmakers possess sufficient information about the econonic system; and (4) corpetition between firms and individuals is sufficiently pervasive. Under these assumptions^ any output changes in

industries secondarily affected by the plan will be offset by changes in other

industries. Expansion or contraction of output and employment of resources in

one industry in a region will result in cpposite changes in output and enployment in another industry in another region. Ihe national economy returns to

full enplqyment after all these changes have had time to work themselves out.

Only the composition of output and the spatial employment of resources is

affected.

Hcweverf there are situations in which regional benefits franfi a plan are

national gains as well. Ihese situations occur when the assumptions specified

above are not true. Suppose a region possesses labor and capital resources

which would be underutilized in the absence of the plan, but which would be

enployed with the plan. Ihenr these regional increases in income and employment may be counted as both regional and national gains fron the plan.

Evaluation Procedures and Regional Development

In 1965, the Water Resources Council was established as an independent executive agency to coordinate the growing number and expanding scope of Federal

water resources planning and action programs. In 1973, WRC issued the

Principles and Standards (58) (59) to supplement earlier planning guidelines.

Since that time, the Federal Government has made procedural interpretations

of the Principles and Standards to guide planning work.

Planning and evaluation procedures outlined in the Principles and Standards

and USD?^ Procedures for Planning Water and Related Land Resources (53) prcP

vide a consistent methodology for appraising alternative plans of water and

land resource develc^anent.

The Principles and Standards specify that plans for the use of the Nation's

water and land resources will be directed toward inproving the quality of life

through contributions to two objectives: national economic development and

environmental quality. Two other accounts, regional development and social

well-being, are required for each alternative plan. It is required that at

least one plan be formulated to optimize the national econanic development

objectives and one plan to emphasize the environmental quality objectives.

Other plans may be developed orphasizing the various components of the two

ctojectives. Each plan must evaluate the quality of life in termis of teneficial

and adverse effects displayed in the four accounts: national economic development, environmental quality, regional development, and social well-being.

Beneficial and adverse effects can be measured in monetary and nonmonetary

terms. Beneficial and adverse effects are estimated in order to measure and

display in appropriate accounts the net changes, with respect to the two

objectives, that are generated by alternative plans.

16
Although it is difficult to iinagine local cooperation and acceptance of a plan

which is detrimental to a region's prospects for develcpn^ent^ regional developiDent per se is not included as an objective under the Principles and Standards.

The regional development account formulated in the Principles and Standards

measures the beneficial and adverse effects of a plan under six broad categories: (1) regional income, (2) regional eirployment, (3) peculation distribution, (4) regional economic base and stability, (5) environmental conditions of

special regional concern, and (6) the effect of the plan on other specified

coirponents of regional develcpment. 10/ The changes occurring in these six

categories when "with" and "without" project analysis is made will provide information to evaluate a plan's fulfillment of a region's development objectives.

The account status of regional development as opposed to the objective status

was a controversial issue throughout the formulation of the Principles and

Standards. In the early drafts of the Principles and Standards, regional development was included as one of four objectives: national economic development,

environmental quality, regional development, and social well-being. However,

the final Principles and Standards include only the first two.

Since the Principles and Standards have been established to guide water and related land resource planning, ultimately their application will depend upon

problems and needs found in the region. The Principles and Standards were not

intended to be step-by-step instructions. Rather, they were developed to

present the network of ideas and concepts that WRC prefers to incorporate into

plans. Only the major ideas are shewn, since it is impossible to identify all

the seccaidary evaluation procedures which might be followed in any particular

study. Therefore, if agencies take the Principles and Standards literally,

flaws and omissions can result.

While public participation is viewed as an essential conponent of multiobjective planning, the expression of local values concerns, and goals will be

relegated to a level of secondary inportance under Principles and Standards

procedures. Under the present Principles and Standards formulation, regional

impacts are recognized only as by-products of plans to achieve the national

econonic development and environmental quality goals. Generally, the individuals most directly affected by a plan will be the residents in the area of plan

implementation. It would seem, in view of stated intentions of the Standards

and Procedures to involve the public in goal and planning formulation, that

regional development should be included as a goal in the development strategy.

If the project is going to be cost shared, then the inpacts of the level of cost

sharing en local goals and objectives should also be recognized in the planning

process. In 1974, the regional developnent ctojective controversy resurfaced in

Section 80(c) of the Water Resources Development Act of 1974. Under this act,

WRC was directed to investigate and study the possibility of including, as a

chief planning objective, regional economic development. The recommendation

10/ This general category could be used to document regional preferences.

Using this element of the regional development account, the region could

promote a plan that did not include econonic growth per se, but rather, an

iiTproved income distribution. This category is only briefly presented in

the Principles and never mentioned in the Standards.

17
of the study was to maintain the present two objectives—national econoniiic

development and environmental quality—and the four accx)unts display—regional

development^ social well-being^ national ecoionic development^ and environmental quality—for plan formulation.

If a regional development objective were established^ plans which would have

net benefits on a combined national and regional basis^ but would not have net

benefits on the basis of national economic development alone, could be considered for inplementation. Plans developed under a regional development objective could differ substantially from plans presently focusing on national

econonic development and environmental quality goals.

The regional development and social well-being accounts present a further

difficulty when attenpting to work within the Principles and Standards guidelines; the distinction drawn between regional development and social wellteing is artificial because widely received concepts of regional development

spill over into the social well-being accoxint. Current thinking and policy

are more directed toward welfare and rural development objectives such as

fuller emplo^nient and higher per capita income rather than to the misleading

standard of aggregate growth. When evaluating potential regional development

iirpacts of a plan, it becomes difficult to disentangle the regional development and social well-being account entries. The result is a tendency to

measure the economic inpacts of regional development and largely ignore the

corresponding social impacts which are more difficult to quantify. Social

well-being and regional development are not mutually exclusive ojuality-of-life

measurements. Certain aspects of the social well-being account would be more

appropriately placed in the regional account. This woxild allow the measurement

of both the ojuality and ojuantity elements of regional development. Account

entries of aggregate inox^me and enplo>yment changes representing the ojuantity

aspects of regional development shoxald be acconpanied by anticipated changes in

per capita income, unemployment and underenployment, and other distributional

measurements to illustrate the quality aspects of regional development.

The present regional account entries measure the means for ao±iieving goals as

a proxy for the goals. One exanple is the treatment of changes in enplo^yment

within the regional account. An increased number of jobs (means) does not

necessarily indicate a decreased level of unemplo>yment (goal), since it may

only result in an inmigration of workers frcxn other areas. In a like manner,

an increased aggregate income level (means) does not necessarily result in an

increased level of per capita income (goal). Per capita income increases or

anticipated decreases in the unenployment rate are more indicative of the

quality of life oE local people than the aggregate changes presently identified

in the regional account.

A further deficiency of the Principles and Standards is the failure to identify

all the regional co>5ts. Growth, particularly population increases, entails

costs such as tax increases to cover the expenses of gro^vth. School populations

will grow, generating the need for larger school budgets; fire and police

protection may need to be expanded; and local health services and the transportation system may be put under strain as a result of a growing population.

In addition, if the wages received by the project workers are higher than

18
local wages, wage rates inay be driven up for types of labor, such as construction labor, which are demanded by the project. Ihis would change the local

income distribution. Housing and land values may become inflated due to population pressures. Social costs such as congestion, noise, pollution, and

crime are also by-products of growth.

Under the Principles and Standards, regional development account changes in

regional income resulting trom plan inplementation are viewed as beneficial

and/or adverse effects. The Principles state:

Where the regional development effects relate to increases in

regional income, two classes of beneficial effects occur. These are:

(1) The value of increased outputs of goods and services

accruing within relevant regions resulting fron a

plan including, in addition to the value of outputs

to users of the plan:

(a) The value to the relevant regions resulting from

the use in construction or installation of the

plan of labor resources otherwise unenployed or

underenplcyed.

(b) Additional net incone accruing to relevant

regions from the construction or inplementation

of a plan and from other econonic activities

induced by operations of a plan.

(2) The value of output resulting from external economies

accruing within relevant regions.

Adverse effects on the regional income include:

(1) Ihe value of resources within relevant regions required

or displaced to achieve the outputs of a plan. This

includes in addition to the value of resources contributed fron within the relevant regions:

(a) Payment through taxes, assessments or reimbursements

by the relevant regions for resources contributed

to the plan from outside the region.

(b) Loss of assistance payments from sources outside

the region to otherwise unemployed or underenployed

resources and displaced resources within the region.

(c) Losses in output in the relevant regions resulting

fron resources displaced and subsequently unenployed.

(d) Loss of net income in the relevant regions from other

economic activities displaced by construction or

operation of a plan.

(2) Losses in output resulting fron external disecononies

within the relevant regions.

While indirect income accruing to a region as the result of a plan is considered a beneficial effect, a similar indirect income withdrawal is not

recognized as a cost. Ihe Principles and Standards acknowledge that any

income displaced to achieve the outputs of a plan is a cost to the region;

however, the present accounting procedure does not recognize that this income—

prior to withdrawal from the region—also generated indirect income within the

19
region. To quantify the indirect income increases accruing to a region as a

benefitf and simultaneously to ignore the indirect incorne withdrawal from an

area/ automatically minimizes the identified costs to the region of plan inplementation. Ihe accounting procedures presently used to quantify the adverse

effects of a plan on regional income should be altered to reflect the additional costs presently ignored.

A question with which the Principles and Standards do not deal is the treatment

of inmigrating labor due to the implementation of a plan. If a local unenployment or underenplqyment problem exists^ should regional gains in enplqyment be

adjusted to reflect only the new jobs filled by local residents? Given the

local unemployment problem^ are jobs filled by outsiders true regional gains?

Potential intraregional problems should be examined at some point in plan

evaluation. Will a project result in a disparity of gains and losses within

the region? For exanple, one county within a region may receive the benefits

of a plan in the form of an increased tax base^ vy*iile an adjacent county is

burdened with the costs of a temporary peculation influx of construction

families. Given present plan evaluation procedures, such problems are not

identified.

Another question that emerges in reviewing Principles and Standards concepts

and methodology is one related to consistent application of the iStihdards. As

stated in the text, the Standards inplement the Principles, eirploying consistent and uniform analytical techniques for judging beneficial and adverse

effects of alternative plans (11, pp. 4, 19, and 22). Plans will likely be

evaluated differently by each agenoy operating under the authority of Principles

and Standards, since different interpretations are likely to be attached to the

technical terminology in Principles and Standards, and differing analytical

techniques will likely be used to identify and appraise the beneficial and

adverse effects of alternative plans.

Externalities and Secondary Market Effects

An externality exists when the social costs and benefits of the actions of an

individual enterprise or institution diverge from the private costs and benefits to that decisionmaker. Externalities are also frequently referred to as

spillovers. The basis of the externality concept is interdependence and the

absence of coirpensation. Those receiving the benefits, whether monetary or nonmonetary, do not pay for them; and those causing others in society to have

higher costs do not pay anything to offset these higher costs.

Some secondary market inpacts are externalities in that they involve monetary

(market) discrepancies between social and private benefits and between social

and private costs. However, not all externalities are secondary market inpacts

since many externalities are not reflected in market transactions. At the same

time, not all secondary market inpacts can be broadly classified as externalities, since the essence of the conçut of externalities is the absence of conpensation and by definition market inpacts involve conpensation. Unfortunately,

USDA procedures for planning water and related land resources do not maintain

the traditional distinction between externalities and secondary inpacts (53).

20
Empirical Estimation of Secxpndary Market Effects

The conceptual analysis of secondary inarket effects presented at the beginning

of this chapter sets the stage for a discussion of hov these effects might be

estimated. Soine type of empirical procedure is necessary if the secondary

market effects of specific plans are to be evaluated.

The essential feature of the analysis is the large number of potential interactions to be quantified. For example/ a tile drainage investment project

requires inputs from construction industries, which in turn increase their

purchases of lumber, other materials, machinery, and labor. These industries,

in turn, increase their purchases from their suppliers. At the same time, the

greater wheat production resulting from the investment implies expansion of

processing and marketing industries, and the circle of market effects continues

to widen. Furthermore, these interactions tend generally to concern relationships between industries, rather than choices of technique within a single

industry.

One type of erpirical analysis is particularly suited to estimation under these

conditions. Interindustry analysis permits the specification of a large number

of transactions between industries and households. The analysis accarplishes

this by sinplifying the technical relationships within an industry, as well as

the economic relationships between individuals and industries.

A number of other enpirical models are available to researchers, though none

are as suited to the analysis of secondary market effects as are I-O models.

Econcmetric models are frequently more accurate than 1-0 analysis, but their

stochastic nature makes them quite time consuming to use. Therefore, the

number of relationships which can be accommodated is limited. Mathematical

programming models represent a second alternative to 1-0 analysis. Hcwever,

their optimizing character inplies that they are more suited to the choice of

a technique within an industry than to the analysis of relations between

industries.

These other techniques are valuable in analyzing many potential aspects of

natural resource plans. However, this report will pursue the hypothesis that

IHD analysis is generally the best available approach to estimating the secondary market effects of plans. The following chapters discuss basic concepts of

1-0 analysis, and will apply the technique to specific exairples of natural

resource plans.

21
CHAPTER IV. I-O CONCEPTS 11/

fcy Charles Palmer, Nelson Bills, and Robert Niehaus

Developed economies are characterized by a high degree of interdependence among

producing sectors. Each economic sector not only produces goods or services

but is a consumer as well, purchasing other goods and services for use in the

productiai process. These relationships have been recognized for a long time.

Francois Quesnay's Tableau Economique of 1758 dealt with circular flavs between

industries and general equilibrium concepts (_4, p. 126). Walras stressed the

interdependence between the production sectors of an econoiry with his general

equilibrium model in the 1870's (_4, pp. 459-463).

The first eirpirical application of the 1-0 model in the Anglo-American world

dates froiïi 1936 when Leontief published an 1-0 system of the U.S. econany (30).

Leontief sinplified Walras' generalized model so that equations associated with

it could be estimated enpirically. He used two siirplifying assumptions. First,

the large number of commodities in the Walras model was aggregated into relatively fev outputs, one for each industrial sector. Second, supply equations

for labor and demand equations for final consunption were abandoned. The remaining production equations were expressed in their simplest, linear form.

These simplifying assunptions provide for important contrasts between I-O and

many other economic models. Ihe assumption of linearity does not allcw factor

substitution or economies of scale. The passage of time is not accounted for,

yet the purchase of inputs by one industry to make goods to sell to other

industries implies a period analysis. The prevalence of joint products and

multiproduct firms makes it inpossible to aggregate only those firms with

similar output and input structures together.

Hcwever, the model is simple and lends itself to eirpirical analysis. Its key

variables are the outputs of sectors into which the economy is divided. Each

sector's output consists of the sum of sales to all other sectors and final

demand. The amount of each product which each sector consumes depends only on

the level of output in the consuming sector. Equilibrium in the econorry is

attained when the output of each sector equals total purchases from that

sector, these purchases being determined by the output of all other sectors.

The Basic I-O Model

The key to Leontief's analytical system is the construction of the I-O or

transactions table. The transactions table shews the flow of commodities

11/ I-O terminology and methodology are not consistent throughout the

literature. Definitions presented in Ajpendix A clarify the terminology as

used in this report.

22
from each of a number of producing sectors to all other consuming sectors,

both intermediate and final. Data provided in the transactions table can be

rearranged to derive a table of technical coefficients and a table of direct

and indirect or total requirements from which I-O multipliers are derived.

These tables receive extensive use in a regional study.

The Transactions Table

A highly siirplified, aggregated version of a transactions table is shewn in

table 1. The transactions table portrays the dollar flews of goods and

services among sectors in an econoiry for a given accounting period, generally

1 year. Sales and purchases among industries are depicted in a matrix of rows

and columns. Along each row is distributed the sales of a given industry to

other industries and to ultimate consumers (final demand). Reading down the

columns of the table, all purchases of the column sectors frcart the associated

rcw sector are recorded.

Table 1—Illustrative transactions table

Processing [

sector ]

Purchasing sector

• Agriculture •

•

Manaufacturing |

•

Services : Final

: demand

-. Total

; output

Agriculture \: 10 6 2 18 36

Manufacturing :: 4 4 3 26 37

Services \: 6 2 1 35 44

Primary inputs î! 16 25 38 0 79

Total outlay :: 36 37 44 79 196

The distinction commonly made in economic analysis between the production of

goods and services and their final disposition is reflected by dividing the

sectors of the transactions table into four groups or quadrants, each representing either an intermediate or a final sector. Table 2 presents a generalized table with the four divisions.

The first quadrant shews the intermediate transactions (i.e, the flow of goods

and services which are both produced and consumed in the process of current

production). There are no maximum or minimum sectors required in this quadrant,

but data limitations often limit the detail to 100 sectors or less. However,

some national models have well over 400 sectors.

Final demand, including ultimate consumers' purchases fron the producing sectors, are recorded in the second quadrant, while the third quadrant represents

the primary inputs of production. As in quadrant I, the number of sectors

depicting the amount of detail is left to the model builder. Table 1 has only

23
Table 2--Generalized transactions table

Purchasing sectors

Intermediate demand Final demand

0

-P

rH

u

•H

bO

4->

O

too cj

.s ^

P! tí

•H ^

CO

0

U

•SUn

Quadrant I

intermediate production ^ consumption

tí

<D 3

á 8

tí

O)

0

0

•H É

tf) O

0 m

BQ i-H

Tí OJ

+->

C/) -H tí

o fe -H

^ U 4->

c/)

+->

O

(/)

O -

+->

CÖ O

Quadrant II

final outputs of

producing sectors

o

U

0

(/)

bOtí •HI

O

Cl,

c/)

+->

P5

P^tí^ •H

0

+->

Cd

•H

0

CO

9^

•HI

Agriculture

Mining

Manufacturing

Trade

Services

Finance

^ir iJ In

-<V • •! • • • • • • ^^ ^ • • • • • JV.m

C. G. 1

n

nl nj nn n n n

^i

n

Quadrant III

primary inputs to

production

Quadrant IV

primary inputs to

final demand

Payments to

Households

Government

Depreciation

Inports

H,

D,

M,

.H. .H

.D.

n

n

n

"c "G "l

^C ^G "l

^C °G °1

.M. .M

n

Nt \

M,

"E

Total gross outlays X,

X.

1

n

H

T

D

M

n

X

24
one sector in quadrants II and III v^ereas table 2 shews both final demand and

prinary inputs broken dcvm to four sectors each.

The fourth quadrant records the primary inputs and imports purchased directly

by the final demand sectors, including such typical entries as income of government employees (HQ in table 2) and imports consumed directly by households

(M^ in table 2).

Summing across a rcM, intermediate demand plus final demand measures total

gross output of industry i. Thus, in an n sector model:

n

X^ = E X + (Cj^ 4- Gj^ + Ij^ + Ej,), i = 1, 2,...,n.

j=l ij

Gross = Intermediate + Final

output demand demand

Summing down a column, intermediate inputs plus primary inputs, yields total

gross outlays of sector j. Thus:

n

Xj, Z X

i=l

_. ^ .vj^. + (H + T + D + M), j = 1, 2,...,n.

Gross _ Intermediate ^ Final

outlays inputs inputs

We may also sum across the totals row and dcwn the totals column to obtain the

econary's total gross output:

n

X = E X. -f-C + G+I + E

j=l -^

and

n

X=E Xi+H+T+D+M,

i=l

n n

Since E X. = E X., all intermediate flew totals can be cancelled out.

i=l j=l ^

We then have:

H-l-T + D-fM = C + G + I + E

25
That iS/ value a<3ded + inports = final denend. Note that this is true for the

totals of individual sectors, though not necessarily for each sector alone.

For exanple, referring to table 1, agriculture's sales to final dernand (18

units) are not equal to agriculture's purchases of pricing inputs (16 units).

One last statentent should be made concerning the corponents of the transactions

table. Total gross output is not the same as gross national product; GNP is

defined as the current market value of final goods and services produced in a

given year. The conputation of GNP has been develcped to eliminate double

counting; hcwever, total gross output measures all transactions in the econorny.

The value of goods and services produced in a given year is deliberately

counted more than one time. Final demand less imports would more closely

correspond to the GNP.

The Technical Coefficients Table

Table 3 is a table of technical coefficients derived from the illustrative

transactions table (table 1). The entries in this table are to be interpreted

as the requirements from each of the producing sectors at the left of the table

in order for each sector at the top to produce $1 worth of output.

Table 3—^Technical coefficients table

Processing ! Purchasing sector

sector !! Agriculture : Manufacturing : Services

Agriculture !: 0.278 0.162 0.045

Manufacturing !: .111 .108 .068

Services : .167 .054 .023

Primary inputs : .444 .676 .864

These technical coefficients are determined by dividing the column entries for

agriculture, manufacturing, and services in the illustrative transactions table

(table 1) by the total outlay of the respective column. In this exanple, the

manufacturing sector requires 16.2 cents worth of input from agriculture, 10.8

cents from manufacturing industries, and 5.4 cents from services in order to

produce $1 of output. The remaining inputs to the manufacturing sector come

fron the exogenous or primary inputs part of the model.

The standard notation for technical coefficients (table 2) is computed as:

a. . = —1, i, j = 1,

ID X. "^

26
where Xj^j is the sales by sector i to sector j and X. is the total purchases of

sector j. By definition, X^ = X^ for all endogenous sectors. The corputation

of aj^j for all cells in the first quadrant of the transactions table results in

a inatrix of a^^-'s or a technical coefficient table.

The Direct and Indirect Coefficients Table

One of the most important applications of the I-O model is to calculate the

output levels in each sector of the economy that would be associated with

changes in deliveries (sales) to final demand sectors of the model. For exanple, suppose that exports from the agriculture sector increase by $1. One

can trace through the results using table 3. In order to sell an additional

$1 worth of output to final denoand, the agriculture sector must purchase 27.8

cents of output from itself/ 11.1 cents output fron the manufacturing sector,

and 16.7 cents output from the services sector. These are first round transactions because for agriculture to sell 27.8 cents to itself, it must again

purchase 7.7 cents more output (27.8 cents times .278) from itself, 3.1 cents

(27.8 cents times .111) fron manufacturing, and 4.6 cents (27.8 cents times

.167) from services. The second round is not finished, because for manufacturing to sell 11.1 cents to agriculture, it must buy 1.8 cents (11.1 cents

times .162) from agriculture, 1.2 cents (11.1 cents times .108) from itself,

and 6 cents (11.1 cents tijnes .054) from services. Similarly, the services

sector must purchase inputs from all three sectors in order to sell 16.7 cents

to agriculture. In just the first two rounds, agriculture has produced $1 for

export, 27.8 cents plus 7.7 cents for itself, 1.8 cents for manufacturing, and

.8 cents for services, totaling $1.38. New, if one were to follow this process

ad infinitum, the total amount each sector would be required to produce could

be calculated. This process is the source of the final demand multipliers.

Leontief, using matrix algebra techniques, devised a much simpler method to

determine the direct plus indirect requirements (total output requirements)

resulting from a final demand change than the method described above. The

Leontief method can be dennonstrated using the information on final demands and

total outputs from table 1 and with the information contained in table 3.

Fran this information, one can specify the follcwing systenn of equations:

Xj^ = .278 X^ + .162 X2 + .045 X3 + Y-j^

X2 = .111 ^i + .108 X2 + .068 X3 4- Y2

X3 = .167 X^ + .054 X2 + .023 X3 + Y3

Xj, X2, and X3 are total outputs of the three endogenous sectors. Y-^, Y2f and

Y3 are the respective processing sectors sales to final demand. The coefficients are the entries in the technical coefficients table (table 3).

27
In itiatrix notation, the system becomes:

.162

.108

.054

Xl .278

X2 = .111

X3 .167

.045 ^1 ^1

.068 X2 + ^2

.023 ^3 Y3

Or, more sinply stated.

X = AX + Y

where X is the vector of total outputs, A is the matrix of technical coefficients, and Y is the vector of final demands.

The above may also be written:

X-,^ - .278 X^ - .162 X2 - .045 X3 = Y-^

- .111 X^ + X2 - .108 X2 - .068 X3 = Y2

- .167 X-,^ - .054 X2 + X3 - .023 X3 = Y3

or

(1 - .278) Xj^ - .162 X2 - .045 X3 = Y;,^

- .111 X-,^ + (1 - .108) X2 - .068 X3 = Y2

- .167 XjL - .054 X2 + (1 - .023) X3 = Y3

in matrix form:

(1 - .278) - .162 -. 045

- .111 (1 - .108) - .068

- .167 - .054 (1 - .023)

^1 Yl

X2 =

Y2

^3 Y3

28
which iray also be written:

10 0

0 10

0 0 1

.278 .162 .045

.111 .108 .068

.167 .054 .023

" ~~~~"

^1 Yl

X2 =

^2

^3 Y3

and may be reduced to:

(I - A) X = Y

where I is the identity natrix, (I - A) is called the Leontief I-O matrix, and

A, X, and Y are defined previously.

The coefficients are now in proper form to solve the Leontief system and find

the vector of outputs required to sustain a given vector of final demands. The

mechanical process is to fii^st find the inverse of the Leontief (I - A) matrix.

The Leontief inverse (I - A) -'- is defined as the direct plus indirect coefficients, or total requirements matrix and is presented in table 4.

Table 4—Direct plus indirect coefficients table

Prcx::essing ; Purchasing sector

sector !! Agriculture : Manufacturing : Services

Agriculture :: 1.4459 0.2678 0.0852

Manufacturing : .1996 1.1628 .0901

Services : .2582 .1100 1.0431

Total or final ;

deirand multiplier :: 1.90 1.54 1.22

To develop a solution, we must prertualtiply both sides of the (I - A) X = Y

equatic«! by the Leontief inverse as follows:

(I - A)"l (I - A) X = (I - A)~l Y

v^ich reduces to:

X = (I - A)"l Y.

29
Using the information in table form and the above matrix, we can develop the

folloving system of equations:

X^ = 1.4459 Y-,^ + .2678 ¥3 + .0852 Y3

X2 = .1996 Y^ + 1.1628 ¥3 + .0901 Y3

X3 = .2582 Y-L + .1100 Y2 + 1.0431 Y3

Returning to our exanple, when another region would like to purchase $1 more

fron the agriculture sector, we would like to determine the total increase in

output resulting from this $1 increase in final demand. Using the above

system of equations, and looking at the $1 increase only, agriculture sales

to final denand (Y-j^) would equal $1, and manufacturing (Y2) and services (Y3)

sales to final demand would be zero. After multiplying through, agriculture

total output (X-^) will be $1.4459, manufacturing output (X2) equals $0.1996,

and services output (X3) would equal $0.2582. Summing the three outputs, we

find the total increase in output resulting from a $1 increase in final demand

of the agriculture sector to be $1.90. We have found the total output (both

directly and indirectly) that this hypothetical economy is required to produce,

in order for the agriculture sector to sell $1 output to a final demand sector.

I-O Multipliers

This chapter has dealt with 1-0 concepts to demonstrate that they can be used

to describe interindustry relationships in a regional economy. To be useful

for purposes of planning, though, the analyst must move 1-0 results beyond the

descriptive stage. Specifically, the model needs to be used to gauge the

overall impact of production increases or decreases in any one sector of a

regional economy. These overall iirpacts can be conveniently summarized by

caiputing 1-0 multipliers.

From time to time, users of 1-0 results have been confused by both the theory

and practice of multiplier computation. The purposes of this report are best

served if a careful distinction is drawn between the theory and practice of

1-0 multiplier computation.

The theory behind the 1-0 multiplier is quite straightforward. The model is

oriented tcward an estimate, on an industry-by-industry basis, of the direct

and indirect requirements associated with unit changes in deliveries to final

demand. Unit or incremental changes in deliveries to final demand are solely

responsible for multiplier effects in the 1-0 model.

The practice of multiplier conputation- on the other hand, has become quite

coTTplex. The corplexity stems from the fact that various kinds of multipliers

can be derived for each industry. The variance stems fron the unit of measure

selected and the conventions used in defining exogenous final demand sectors.

30
Units of Measure

I-O practitioners have paularized three units of measure for multiplier

effects. They are (1) gross output or sales, usually referred to as final

deiïiand multipliers; (2) household income, referred to as incan^e multipliers;

and (3) enployment, usually referred to as employment multipliers. Each

measure can yield a different picture of a regional econory. There are

differences because gross output/household income ratios and gross output/

erplcyment ratios can exhibit wide variation among industrial sectors in a

regional economy. Such factors as wage rates, capital intensity, and the

geographical pattern of resource ownership, for example, can cause fundamental

differences in these relationships. Measurement of multiplier effects with

several units of measure can capture many of these differences and yield

valuable insights for water resources and other regional planning. Measurements in terms of household incone and/or employment are particularly valuable

in that they help sharpen the focus of a plan on the potential well-being of

local citizens.

Type I and Type II Multipliers

The second source of carplexity in the practice of multiplier corputation stems

from conventions used in defining final demand sectors of a local economy. I-O

practitioners once again have popularized two treatments of final demand

generated by local household consumption. They have coined the terms Type I

and Type II to keep the treatment separate.

The first treatment, the Type I multiplier, defines local household consuirption expenditures (direct sales to local households) as being exogenous to

the model. These multiplier effects can be measured in terms of gross output,

household incoiie, and/or employment.

The second treatment, the Type II multiplier, defines local household consumption expenditures as being endogenous to the model. That is to say, local

households are treated as another industry in the model. Households sell

labor, rent property, provide financing, and perform services for which they

receive wages, salaries, interest, and dividends, and their purchases of

locally produced goods and services are considered to be parallel with those

emanating fron other local industrial sectors. This procedure allows one to

take into account the induced effects of new rounds of local household consumpticai expenditures on the local economy. These multiplier effects can also be

measured in terms of gross output, household income, and/or eirployment.

There are sound economic arguments for treating local households as an industry

in an I-O analysis. When output changes in response to a change in final demand, we know that household income increases by definition. New household

31
incxïne in turn is very likely to result in new household consunption expenditures. 12/ New consunption expenditures generate repercussions of their own

on the local economy. The Type II multiplier is used to estimate the magnitude of these repercussions on an industry-by-industry basis.

The Region and I-O Analysis

This chapter has dealt with the basic 1-0 analysis concepts in a very general

way. The discussion has concentrated on the elements of an 1-0 model without

relating the model to any specific geopolitical entity. Model application involves a particular problem setting, however. It is necessary to define the

problon in specific geogr^hic terms. The problen setting has inportant implications for the structure and empirical estimation of the model. For example,

the analytical problems posed by application of the model to a multistate

regicxi, such as New England, would be different fronn those encountered when

the model is applied to a multicounty, substate region, such as northwestern

Arkansas. In turn, both of these sets of analytical problems differ from

those involved in ^plying 1-0 techniques to the national econony.

Since the focus of this report is on the economies of subnational and substate

areas, it is useful to discuss the most important problems encountered in

applying 1-0 analysis to the study of regional economies of this size. Because

extensive 1-0 modeling efforts take place at the national level, it is particularly important to note hew analysis at the subnational level differs fron

national analysis. The following discussion will highlight several key

characteristics of 1-0 analysis at the subnational regional level.

Industry Size and Location

One basic difference between national and regional econc»nic analysis concerns

industry size and location. Regional economies are smaller than national

economies in two ways: (1) there are probably a smaller numlDer of different

types of industries located in the region than in the Nation and (2) the output of each industry will be less for the region than the Nation as a whole.

This means that the regional analyst must determine which industries are

located in the region, and how much each of those industries produces. Producing sectors in the intermediate transactions matrix must be properly defined. Total gross output for each industry must also be estimated.

12/ Not all new household inconfie is necessarily spent immediately. New

income probably results in some combination of consumption and savings. Yet,

this fact does not detract from the argument for a Type II multiplier because

a combination of consunption and saving behavior is already accounted for in

the 1-0 model. A difficulty does arise, however, if additional income leads

to changes in the proportion of income saved and the prqportion spent. Since

there is seme evidence that the fraction of income saved rises with incone,

the lype II multipliers may overestimate the output change associated with a

change in demand.

32
Technology

A second inportant difference between regional and national analysis is the

variation in production technology. A national analysis is based on industry

production techniques which represent an average for all regions of the

country. A regional analysis, on the other hand, must consider the technical

relationships applicable only to that region. These relationships may vary

significantly fron region to region because of differences in the age of the

capital stock, relative prices, and resource endowments.

Differences in technology have important implications for regional I-O analysis.

The table, of regional technical coefficients should reflect regional production

techniques, rather than national average technology. Often, hcwever, empirical

necessity dictates that national coefficients be used as first approximations

to regional technical relationships. When this is the case, it is important

that the coefficients be examined and occasionally adjusted to reflect local

productiai conditions more accurately.

Consumer Demand

Just as production technologies may vary from region to region, consumer demand

patterns differ in different regions. Relative prices, consumer preferences,

and personal incomes are key determinants of consumption expenditures on

different conmodities, and each of these factors can vary substantially between

regions.

In I-O teriDs, these differences in consunption patterns must be reflected in

the final demand sector of the interindustry model. Again, there is no reason

to expect national average consumer demand patterns to reflect regional demands

accurately. The correspondence between regional and national average patterns

may or may not be close, and enpirical research offers the only solution to

the problenii.

Industry Ccmposition

A fourth important characteristic of regional analysis is the difference

between the composition of industries at the regional level and the composition

of industries at the national level. This difference arises from the way the

industries are aggregated and is distinct from the industry size and location

consideration discussed above.

If any econonic analysis is to be viable, it is necessary to aggregate individuals and goods into groups based upon like characteristics. In the case of

industries, it is necessary to aggregate the production of reasonably similar

commodities into industry groupings. For example, shoes may be grouped with

belts, handbags, and leather jackets to derive a leather goods manufacturing

industry.

33
It is possible, even probable/ that the mix of product lines within similarly

labeled industries will vary frcm region to region. At the national level,

the conposition of the leather goods industry represents an average over all

regions of the conposition of the industry in each region.

Regional I-O analysis must take into account these differences in industrial

coTposition between regions. The technical coefficients for each industry in

the regional model should be weighted averages for that region of the coefficients for the product lines and subindustries within that industrial sector.

Again, use of national average coefficients m^ or may not result in significant

distortions of the true regional industrial conposition.

Interregional Trade

A fifth notable characteristic of regional analysis is the importance of trade

between the study area and other regions. Ihis is in sharp contrast to a

national level analysis for a country like the United States. The United

States as a whole is a relatively closed economy. That is, most intermediate

and final transactions take place within the econory itself; foreign trade is

a fairly small proportion of the total.

For a region within the United States, however, it is clear that external trade

fcy the region is a very important part of its total transactions. 13/ Very few

small regions are self sufficient in the production of goods consumed within

the region. Similarly, only infrequently does the region consume all it

produces.

Vttien 1-0 techniques are applied to regional econanriic analysis, they must reflect the importance of this interregional trade. There are basically two w^s

to incorporate the patterns of trade into interindustry analysis. The first

technique is to construct the table of regional flews to reflect only those

purchases and sales which take place within the region. Using this approach,

all goods inported into the region fcy an industry, or imported directly to

satisfy final denand, are lumped together into a single imports rcw, regardless

of the region of origin. For example, inported leather, laces, buckles, and

thread for the leather goods industry are given a dollar value and aggregated

to a single inport item. At the same time, goods produced in the region fc)ut

sold to external buyers are aggregated into a single exports column without

regard to industry or region of destination.

When the region under study is fairly small, and the focus of the analysis is

that region in isolation (rather than closely related regions as well), this

first technique produces satisfactory results. In fact, use of this method is

so extensive that it has exprcpriated the more general name of regional 1-0

analysis.

13/ Because of the closed nature of the U.S. econory, the technical coefficients in the U.S. table are often thought of as representing a production

function. However, due to the relatively large percentage of interregional

flows in a regional economy, the regional technical coefficients table is not

a close representation of a production function.

34
The second basic technique for dealing with trade between regions is usually

termed interregional I-O analysis. As the name suggests, this method places

greater emphasis cai the interregional linkages between several related regions.

In its most ambitious fonrir multiregional 1-0 analysis, the entire Nation is

disaggregated into regions, and the trade linkages between each region and

industry are specified.

The most important distinction between regional and interregional analysis is

that the informaticai on regional and industrial origin of iirports and destination of e5Ç>orts that is aggregated and ignored in the former technique is retained and utilized in the latter. The obvious advantage of interregional

analysis is that more information is available on the linkages between regions.

Specifically, it is possible to take account of interregional feedbacks—

changes in demand in one region v^ich may trigger output changes in a second

region, which in turn lead to further changes in output in the first region.

The disadvantage of this more sophisticated method is its cost in terms of data

and time required. For the most part, the eirpirical sections of this report

will deal with the first technique discussed here.

Data Acquisition

The sixth and final characteristic of regional analysis to be discussed here is

the problem of data acquisition. Because there are significant costs involved

in the collection of economic and social data, it is often necessary for government agencies and private research organizations to establish priorities concerning the kinds of data they will collect. Generally speaking, data on output, income, and enplqyment at the national level of aggregation receive higher

priority than do similar kinds of data for U.S. regions. Detail and statistical

reliability are therefore the greatest at the national level, and become progressively worse as the unit of analysis becomes smaller.

Data problems at the multicounty, county, and subcounty levels can be especially

acute. Typical data problems include the following: (1) small area national

surveys are usually undertaken only once every 5 or 10 years, or less often, and

are always several years out of date; (2) because it is illegal for the Government to disclose confidential business information about a single firm or

individual obtained through surveys, there are often serious gaps in available

information for small study areas so that disclosure can be avoided; and (3)

the frequent need to conduct a study along nonpolitical boundaries (such as a

river basin, or a functional econanaic area) means that it is often necessary

to inpute information ahxxit the study area, instead of obtaining it in a more

direct fashion.

35
CHAPTER V. THE USE OF I-O ANALYSIS IN PLAN EVALÜATI(»Í

by Sterling Stipe, Richard Clark, and Clifford Jones

In this chapter, the basic concepts associated with 1-0 anlaysis will be applied

to a hypothetical project, using an I-O model developed for a regional eccaioiTy

in the northeastern united States. In addition, the results of the exanple

are displayed in the appropriate accounts as defined in the Principles and

Standards. The demonstrated effects are not all inclusive. Some project

effects do not lend themselves to I-O techniques. Also, the intent of this

chapter is to demonstrate the more common uses of I-O, rather than to provide

a oonplete guide to project analysis.

An Overview of the I-O Tables

To reiterate, there are three tables or matrices basic to I-O:

(1) The transactions table (tables 1 and 5).

(2) The table of technical coefficients (tables 3 and 6).

(3) The table of direct plus indirect coefficients (tables 4 and 7).

Assume that a suitable transactions table for the study area has been obtained

from either (1) primary data collected fron local businessess and households

or (2) the national I-O technical relationships using the secondary data methods

explained in Appendix B.

The direct plus indirect coefficients matrix can be used to estimate the impacts of expected changes in final demands that will result from the alternatives under study. A given alternative may directly affect more than one

local sector. Once the direct project effects on each sector are properly converted to final demand changes, 14/ the use of the direct plus indirect coefficients table will permit determining total gross output change in the whole

econany and in each sector.

Three steps are necessary in estimating iirpacts with the direct plus indirect

coefficents table:

(1) Estimate direct output changes by sector from all available

data about expected direct effects of each component of the

particular plan under study.

(2) Convert the direct output changes into final demand changes

by sector, i.e., prepare a final demand change vector.

(3) Multiply the final demand change vector by the direct plus

indirect coefficients matrix to obtain a gross output change

vector.

14/ Exanple 11 in Chapter VI discusses the conversion of direct project

effects to final demand changes.

36
Table 5—Transactions table for I-O model 1/

Sectors

(1)

Livestock

(2)

Other

agriculture

(3)

Agricultural

services

(4)

Mining

(5)

Construction

(6)

Manufacturingfood

(7)

Manufacturingother

(8)

Manufacturingwood

(9)

Transportationfinanceinsurancereal

estai-p

(10)

Retailwholesale

(11) :

Services. Households

Other

final

demands

Total

gross

output

1,000 dollars

(1) Livestock 5,655 407 1,535 0 0 8,803 302 0 60 0 381 842 51,149 69,134

(2) Otheragriculture 17,117 1,207 4,216 0 147 2,829 2,864 1 411 46 1,014 4,163 0 34,015

(3) Agricultural

services 2,505 3,249 26 0 517 0 926 7 102 258 88 278 16,382 24,338

(4) Mining 6 83 0 331 2,761 5 2,453 5 21 10 0 0 5,787 11,462

(5) Construction 584 358 0 88 71 253 3,489 26 11,207 2,340 6,963 15,004 214,783 255,166

(6) Manufacturingfood 9,482 0 313 0 0 10,636 971 1 290 1,347 4,421 40,288 6,731 74,480

(7) Manufacturingother 654 931 1,298 1,381 43,664 4,926 372,389 558 8,705 12,900 32,049 20,561 640,078 1,140,095

(8) Manufacturingwood 3 206 49 0 3,158 59 2,084 634 12 168 28 65 0 6,466

;9) Transportationfinanceinsurancereal estate 3,970 1,795 988 991 10,590 3,900 52,939 363 91,914 63,983 61,424 217,557 216,979 727,393

(10) Retailwholesale 3,573 1,477 265 244 19,808 2,849 34,992 281 15,096 9,826 12,931 356,482 154,896 612,720

(11) Services 1,110 1,235 8 446 12,671 3,521 35,384 136 54,244 38,276 31,079 239,507

102

62,666

1,629,596

480,283

Households 17,545 12,375 7,479 5,071 67,236 10,085 316,679 2,499 269,146 241,957 198,729 2,778,500

Other final

payments 6,928 10,692 8,163 2,910 94,543 26,614 314,622 1,953 276,185 241,609 131,176 1,883,651 2,244,958 5,244,004

Total gross outlay 69,134 34,015 24,338 11,462 255,166 74,480 1,140,094 6,466 727,393 612,720 480,283 2,778,500 5,244,005 11,458,056

1/ This is a transactions table taken from an 1-0 model developed for the Northeast United States.
Table 6—Technical coefficients table for I-O model 1/

Sectors

: (1)

•Livestock

(2)

Other

agriculture

(3)

Agricultural

services

(4)

Mining

(5)

Construction

(6)

Manufacturing

food

(7)

Manufacturing

other

(8)

Manufacturing

wood

(9)

Transportationfinanceinsurancereal

estate

(10)

Retailwholesale

(11)

Services

(1) Livestock 0.081798 0.011966 0.063070 0 0 0.118193 0.000265 0 0.000082 0 0.000793

(2) Otheragriculture .247592 .035485 .173227 0 .000576 .037983 .002512 .000155 .000565 .000075 .002111

(3) Agricultural

services .036234 .095519 .001068 0 .002026 0 .000812 .001083 .000140 .000421 .000183

(4) Mining .000087 .002440 0 .028878 .010820 .000067 .002152 .000773 .000029 .000016 0

(5) Construction .008447 .010525 0 .007765 .000278 .003397 .003060 .004021 .015407 .003819 .014498

(6) Manufacturingfood .137154 0 .012861 0 0 .142803 .000852 .000155 .000399 .002198 .009205

(7) Manufacturingother : .009460 .027371 .053332 .120485 .182877 .066139 .326630 .086298 .011967 .021054 .066729

(8) Manufacturing- :

wood .000043 .006056 .002013 0 .012376 .000792 .001828 .098051 .000016 .000274 .000058

(9) Transportation- :

finance- :

insurance- :

real estate : .057425 .052772 .040595 086460 .041502 .052363 .046434 .056140 .126361 .104425 .127891

(10) Retail- :

wholesale : .051682 .043423 .010888 021288 .077628 .038252 .030692 .043458 .020754 .016037 .036924

(11) Services : .016056 .036309 .000329 038911 .049658 .047274 .031036 .021033 .074572 .062469 .064710

1/ This is a technical coefficients table taken from an 1-0 model developed for the Northeast United States
Table 7—Direct plus indirect coefficients table for I-O model \j

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Transpor-

(10) (11)

Sectors Livestock Other

agriculture

Agricultural

services Mining Construction

Manufacturing

food

Manufacturing

other

Manufacturing

wood

tationfinanceinsurancereal

estate

Retail

wholesale , Services

(1) Livestock 1.121370 0.021696 0.076651 0.000294 0.000562 0.155866 0.001003 0.000344 0.000473 0.000629 0.002712

(2) Otheragriculture .308029 1.061348 .204981 .000910 .002253 .090227 .004779 .001130 .001271 .000881 .004160

(3) Agricultural

services .070288 .102413 1.023575 .000326 .002590 .014479 .001778 .001506 .000403 .000625 .000874

(4) Mining .001232 .002983 .000806 1.030310 .011851 .000752 .003420 .001308 .000340 .000206 .000496

(5) Construction .016782 .014061 .004915 .011608 1.004181 .010069 .007277 .007217 .019634 .007379 .019128

(6) Manufacturingfood .181476 .005865 .028088 .001065 .001528 1.193040 .002518 .001069 .001784 .003719 .012469

(7) Manufacturingother .067837 .066417 .099936 .197265 .289299 .140056 1.498251 .152226 .037023 .045094 .119354

(8) Manufacturingwood .002887 .007758 .004042 .000722 .014625 .002242 .004245 1.109258 .000418 .000554 .000715

(9) Transportationfinanceinsurancereal estate .130503 .090596 .079715 .126394 .088030 .116778 .096402 .093070 1.165692 .137433 .173081

(10) Retailwholesale .088313 .056374 .031508 .033867 .093334 .068794 .051675 .057571 .030136 1.023667 .039611

(11) Services .059967 .056145 .023215 .062477 .077165 .085655 .061809 .041804 .097397 .081472 1.091484

Total final demand

multiplier 2.048684 1.485655 1.577432 1.465237 1.585418 1.877957 1.733155 1.466503 1.354571 1.301659 1.464084

\J This is a direct plus indirect coefficients table taken from an 1-0 model developed for the Northeast United States.
All the above steps are inportant/ but Step 2 is particularly crucial. It is

very easy to misinterpret I-O results if Step 2 is mishandled. The conversion

from direct output to final demand changes in specific sectors will at best

require several assunptions. The validity of these assunptions is critical for

proper interpretation of the impacts of the prc^XDsed change. Examples of the

procedure and necessary assumptions will be presented in the subsequent

sections.

Estimating Direct Inpacts

Suppose that Project X^ one corponent of Plan A, is channel construction which

will provide better outlets for farm drainage systems. The channel construction proceeds over a 3-year period. Funds totaling $3 million 15/ are disbursed fcy the Federal treasury for project construction during the construction

period. Ihese funds are all paid to the construction industry. Farmers are

aware that the project will make additional drainage possible on their individual farms. IXiring the third year, v*ien it becomes obvious that the project

will be coTpleted, some farmers begin to install tile drainage. Their expenditures for construction are expected to be small in year 3, but to rise in years

4, 5, and 6, and then become insignificant after year 8. Further assume that

all farmers will contract the tile work; therefore, their expenditures will

also be paid to the construction industry. It is expected that farmers will

drain 12,000 acres at an average cost per acre of $275 for a total of $3.3

million.

Table 8 shews the assumed inpacts of the drainage conponent that lead to the

initial sector receipt changes in table 9. The analyst must consider v^iether

or not the additional income to the construction sector will be spent by that

sector in a manner similar to that depicted by the 1-0 model. Unless there are

sane obvious discrepancies between the additional expenditure and the existing

expenditures, it is usually assumed that the model represents the correct expenditure pattern for the sector of interest (construction in this case).

The problem of new income to a sector not being spent in a manner similar to

that depicted in the model can arise due to at least four reasons. First, a

highly aggregated sector may create problems for the analyst. A highly aggregated sector is one in which several related, hxat different businesses are

included. For exanple, in a model that contains one sector for agriculture

in an area that is quite diverse agriculturally, that single agricultural

sector would he highly aggregated. That sector might represent the purchasing

and selling patterns of dairy farms, cattle feeders, cow-calf operations, dryland farms, and irrigated farms; the agricultural sector represents sane sort

of an average for all these kinds of operations. Any one of these operations

may have expenditure patterns that diverge quite significantly from the average.

If the project or plan impacts only one of these types of agricultural firms

and its expenditure pattern diverges substantially from the average, then use

157 This is a final demand change. The local construction sector is exporting channel construction purchased by the Federal treasury. The reasoning

behind the identification of this $3 million as final demand is discussed

further on page 43.

40 .
Table 8--Initial changes in acreage drained, on-farm costs, and output due to the

drainage conponent of Plan A

Item [Units Project year

: 1 : 2 : 3 4 5 : 6 : 7 8:9: 10 5/

Annual area

drained ¡Acres 1 ,090 2,181 2,545 2,546 2,183 1,455

Drainage

cost 1/

:1,000

rdols. 300 600 700 700 600 400

Corn :

product 2/ : Bu. 32,700 65,430 76,350 76,380 65,490 43,650

Cumulative

change 3/ , do. 32,700 98,130 174,480 250,860 316,350 360,000 360,000

Value of

cumulative

change 4-/

1,000

dois. 55 166 295 424 535 608 608

Expended by :

Federal :

Treasury

for channel :

construction: do. : 500 1,500 1.,000

_2/ Corn yield increase due to drainage = 30 bu. per acre. Value in this row is lagged one year from

the year land was drained.

_3/ Annual increased corn production due to drainage.

_4/ Price of corn = $1.69 per bu. in 1975 prices.

5^/ Annual effects continue for life of project at level obtained in year 10.
Table 9--Estimated changes in sector receipts by year due to the drainage conponent of Plan A 1/

I-O model sector

Project year

10 3/

to

Livestock

Other-agriculture

Agricultural

services

Mining

Construction Ij

Manufacturing-food

Manufacturing-other

Manufacturing-wood

Transportationfinance-insurancereal estate

Retail-wholesale

Services

500

55

1,500 1,300 600

1,000 dollars

166 295 424 535 608 608

700 700 600 400

\j Derived from data in table 8.

Tj The construction row is a combination of expenditures by the Federal Treasury for channel construction and expenditures by

farmers for tile drainage installation with an overlap of the expenditures in year 3.

¿/ Annual effects continue for life of project at level obtained in year 10.
of the highly aggregated agriculture sector for inpact analysis could be quite

misleading. Unless the model can be disaggregated to several agricultural sectors ^ the user cannot do much to alleviate the problem. However/ he should be

aware of it and terper his conclusions accordingly.

A second cause of income not being spent as depicted in the model relates to

the age of the model in use. Sectors whose input structures tend to change

slovly are less susceptible to this problem than those that change quickly.

If the industry being analyzed is changing rapidly, the analyst is on shaky

ground using an older model for analysis. Many industries tend to change

slowly so structural coefficients of a model are useful for several years.

A third possible source of expenditure deviations is that a project will bring

into the local econonoy a new business or industry not represented by a sector

in the existing I-O model. Suppose the project being analyzed is introducing

irrigation into an area that has always been used for dryland crops and

ranching. The expenditure patterns for irrigated farms is likely to be quite

different from those in an existing model. Use of multipliers fron an existing

model without modifying it could lead to erroneous conclusions.

The fourth possible source of the problem caries about because expenditures for

the project or plan are not typical for a sector that exists in the I-O model.

However/ if these expenditures are known and can be separated fron the total,

the analyst can adjust his procedure. Suppose the construction expenditures

were typical except for the $500,000 to be spent in year 1 (table 8). Suppose

these funds are to be spent by the construction sector entirely outside the

econcmy teing analyzed. Ihe analyst can exclude that amount from his analysis

of impacts on the local economy. An exanple is presented in Chapter VI.

For the hypothetical example being discussed, the previous four problems will

be ignored. Hovever, in many actual situations, these problems cannot be overlocked. In this sample problem, "other-agriculture" includes farm sales of

crops and forest products, so it could be susceptible to the aggregation problem

mentioned above.

Table 9 shews the receipts received by the sectors directly affected by the

channel work and by the drainage corrponent of Plan A, namely, construction and

other-agriculture. These receipts must be reviewed to decide whether they (1)

present total gross output changes; or (2) are themselves final demands. If

they are total gross outputs, they must be reduced to final demands for proper

use with the direct plus indirect coefficients matrix for impact estimation.

In the example under consideration, the construction sector is exporting channel

construction to a buyer outside the local economic area (the Federal Government). Even though the construction takes place locally, the effect is similar

to an export of goods. Ihe money flews into the local econoiry from an outside

source. Thus, Federal payments to the construction sector represent changes in

final demand for the construction sector. When farmers buy tile drainage fron

the construction sector, they are engaging in capital formation. Farmers are

deferring consuirption in order to build (to form) additional capital when they

invest in drainage. The money they use may be borrowed, it may come from

43
savings^ or it may be fron current cash flow. This again represents a change

in final demand for the construction sector. Since the tile systems will last

more than 1 year, they represent a sale of goods that are removed from further

processing in the local econony.

In years 1 and 2, the construction sector's receipts due to Project X are all

fron outside the project area and do not include any sales from one local

processing sector to another. Tîierefore, these receipts can be considered to

be final demand. They will generate some buying and selling among local sectors. This ripple effect will increase the construction sector's total gross

output above the $500,000 received in year 1, and will increase the total gross

output of other local sectors as well.

In year 3, the construction sector receives $1 million from the U. S. Government for channel work and $300,000 from farmers for tile drain installation.

As explained above, the entire $1.3 million represents final demand which the

construction sector must satisfy.

The sales of com from increased yields on the drained land represent yet

another type of receipt. In deciding hew to use the model with respect to

these receipts, the analyst must know the source of demand for the corn. Demand for additional feed grain, such as the corn used in this example, must

exist if fanners are to sell additional corn. They must be reasonably certain

that a market exists or they will not install drainage to increase production.

The local elevator or grain dealer who buys from farmers is expecting to market

the grain to local livestock feeders, dairy farms, and local grain processors,

or to sell it (export it) outside the area. 16/ That portion that he sells

locally remains in the local processing sector. It is further processed either

through livestock or through milling companies, so it is not a part of final

demand for the other-agriculture sector. The exported part is part of final

demand and once estimated, its value can be shown as a final demand change for

the other-agriculture sector. The amount of increased final demand for the

livestock sector (and any other local sector which buys grain from otheragriculture) necessary for the livestock sector to purchase the unexported

output of grain must be estimated.

Assume that a separate analysis shows that 50 percent of the additional com

production will be exported while 20 percent will be purchased locally by the

livestock sector and 30 percent will be purchased locally by the manufacturingfood sector. In year 4, these percentages translate into $27,500, $11,000,

and $16,500 respectively (table 10). Thus, the $27,500 is exported and goes

in the model as a change in final demand for the other-agriculture sector.

The $11,000 worth of com purchased by the livestock sector will be purchased

only if the livestock sector can experience an increase in its final demand.

The direct plus indirect coefficients table (table 7) shows that for each $1.00

that the livestock sector delivers to final demand, the local econon^ will

16/ The processing of the grain fron the project is sanetimes referred to

as a forward linkage since the iirpacts in part go from the farms forward to

processors. The impacts of the expected gains are sanetimes referred to as

backward linkages since all the impacts go from the fanner back to his

suppliers of inputs.

44
purchase $.308029 from other-agriculture. IhuSf the livestock sector final

deiTBnd must increase by at least $35^711 17/ if it is to support the local

economy in disposing of $11^000 worth of grain from other-agriculture 18/. The

livestock sector will purchase inputs from other sectors also but those inpacts

will be accounted for when the final demand change sector is multiplied by the

direct plus indirect coefficients matrix. By an analysis similar to that for

the livestock sector, the final demand of the manufacturing-feed sector must

increase by $182,872 19/ if it is to purchase an additional $16,500 frcxn otheragriculture. 20/ Whether or not the impacts from these processing sectors are

in fact due to the project is a crucial question. That question is addressed

in a later section concerning implications of the direct inpacts.

Table 10 reflects the assumption that after year 8 the direct impact on the

construction sector has becon^ insignificant. Any impacts after that time are

secondary in nature and arise due to the increased annual sales by the otheragriculture sector which, other things equal, continue as long as the drainage

system is functioning properly.

The Time Question

The next problem to be considered is hov the time stream of new final demands

will be averaged. It would be possible to run the I-O model for each year but

this would be costly in computer time and probably would not improve the

analysis significantly.

17/ $11,000 f $.308029 = $35,711 (see table 7 for coefficient).

18/ The $35,711 is probably an understatement of the necessary increase in

final demand for livestock. The livestock sector undoubtedly purchases other

items fron the other-agriculture sector besides com to support its final demands. For example, roughages and other feed grains would be needed to go

along with the $11,000 worth of corn. So, the true needed increase in final

demand for livestock would be ($11,000 + $ roughage purchase + $ other feed

grain purchases)/$.308029. For purposes of this example, it will be assumed

that com is the only item purchased by the livestock sector from the otheragriculture sector.

19/ $16,500 f $.090227 = $182,872 (see table 7 for coefficient).

20/ The previous analysis has treated the $55,000 in increased output as

the change brought about by the drainage improvement only. As such it is not

to be viewed as a constraint on increased production from the other-agriculture

sector. In fact, it can be shewn that total output in the other-agriculture

sector must increase by an amount greater than the $55,000. The example

assumed that $27,500 of the $55,000 due to drainage would be exported or go

to final demand. By analysis similar to that in the above text, the $27,500

increase in final demand must be acconpanied by an increase in gross output

in that sector of $29,287. In addition, the change in the construction

sector's final demand in year 4 of $600,000 (table 10) must be accompanied

by a $1,352 expansion in other-agriculture. So, total gross output in the

other-agriculture sector will change by $58,039 ($11,000 + $16,500 + $29,187 +

$1,352 = $58,039). All of these effects are taken into account, however, by

applying the multipliers for each of the respective sectors or by multiplying

the final demand change vector by the direct plus indirect matrix.

45
Table 10—Final demand changes due to the drainage components. Plan A, Project X

Project year

I-O model sector

1 : 2 : 3 ; 4 5 ; 6 : 7 ; 8

9 and each

: year thereafter A/

1,000 dollars

Livestock 1/ 35.7 107.8 191.5 275.3 347.4 394.8

Other-agriculture 27.5 83 147.5 212 267.5 304

Agricultural services

Mining

Construction 500.00 1,500.0 1,300 600 700 700 600 400 -

Manufacturing-food ll 182.9 551.9 980.9 1,409.8 1,778.8 2,021.6

Manufacturing-other

Manufacturing-wood

Transportation-financeinsurance-real estate

Retail-wholesale

Services

Other agricultural sales

distribution

20% Livestock 3/ 11 33.2 59.0 84.8 107.0 121.6

30% Manufacturing-food 3/ 16.5 49.8 88.5 127.2 160.5 182.4

50% Export 27.5 83 147.5 212 267.5 304

Total other-agricultual

sales 55 166 295 424 535 608

\l Inverse coefficient showing purchases from other-agriculture per one dollar sold to final demand is $.308029.

_2/ Inverse coefficient showing purchases from other-agriculture per one dollar sold to final demand is $.090227.

3^/ See discussion concerning implications of direct impacts.

kj Annual effects continue for life of project at level obtained in year 9.
If the model could be run for each year^ the annual secondary benefits could be

combined with the annual direct benefits and discounted back to the present.

But, given the accuracy level of the projected direct effects, it may be

sufficient to synthesize 2 or 3 typical or average years and let these represent the annual project effects over sane appropriate time period.

For this hypothetical exanple, three synthetic or typical years were prepared

for the years 1-3, 4-8, and 9-12 respectively (table 11). The annual flews

shewn in table 10 were reviewed in choosing these time periods and final

demands.

Implications of Assumed Direct Impacts

The necessary changes in final demand and the yearly flews of these final demands have been estimated. Before proceeding with the analysis and developing

conclusions concerning total Project X inpact on the regional econony, consider

what those final demand changes mean. Vfe must be sure the changes in final

demands can be reasonably attributed to the project being examined.

The $1.1 million (table 11) assigned to final demand for the construction sector for each of the first 3 years presents few prcfclems. Since most of this

money comes from outside the local economy and since it clearly would not hafpen

without the project, it is valid to count this as a regional impact due to the

project. The $300,000 (table 8) that ccanes from the farm sector for capital

formation (drain installation) could not have occurred without the project because outlets for farm drainage systems were not adequate.

Detailed examination of the final demand changes for the remaining years is not

as reassuring as for the first 3 years. Table 10 displays the yearly estimates

by sector. Recall that the final denaand changes for the other-agriculture sector beginning in year 4 are export sales of the increased com production that

was due to the project. If the export market exists and if the new production

does not affect market prices, then this final demand change is logical. As

discussed above, the final demand to the construction sector created by farmers

installing drains is reasonable also (the 600, 700, etc., in the construction

rew).

The renaining two final demand increases, livestock and manufacturing-food,

must be scrutinized more closely. Before one can legitimately say that the increased final demands in these two sectors are stenming from (due to) the plan

or project, one must be willing to also say that the increased com production

was the only constraint on expanded livestock production and expansicxi in the

manufacturing-food sector; this condition may or may not be the case. For example, if an area is already a net exporter of com and a processor or feeder

wanted to expand, he could purchase grain that is currently being exported. If

such a situation exists, it is unlikely that increased com production due to

the drainage will bring about an expansion in these other sectors. A more

logical assunption in this case would be to to place all of the increased grain

production into the final demand change for the other-agriculture sector on the

assumption that it will be exported.

47
Table 11—Final demands based on averaged values, drainage component, Plan A 1/

4^

00

Proiect year

I-O model sector

1 ! 2 : 3 ! 4 ; 5 ! 6 ; 7 8

: 9 and each year

: thereafter 2/

1,000 dollars

Livestock 191.5 191.5 191.5 191.5 191.5 394.8

Other-agriculture 147.5 147.5 147.5 147.5 147.5 304

Agricultural

services

Mining

Construction : 1,100 1,100 1,100 600 600 600 600

Manufacturing-food 980.9 980.9 980.9 980.9 980.9 2,016.6

Manufacturing-other

Manufacturing-wood

Transportationfinance- insurancereal estate

Retail-wholesale

Services

1^/ The final demands for each sector for the first 3 years are an average of those that appear in table 10. Similarly, the

sector final demand changes for years 4 through 8 represent averages of years 4-8 in table 10 and final demand changes for years

9-12 are averages of the yearly figures in table 10.

Ij Annual effects continue for life of project at level obtained in year 9.
Situations ney exist where the project or plan (via increased production) would

actually lead to expanded feeding or processing. For exanple^ a sugar beet

processing conpany may not be willing to build in a given area without stable

and adequate supplies of beets. A large irrigation project that could guarantee

at least 30^000 acres of sugar beets per year might be the key factor in the

plant's location decision. If the demand for the sugar exists and one could be

fairly confident that the plant would move in^ then using the increased final

demand for sugar necessary for the purchase of production from 30^000 acres of

beets would be more logical. In this case, sugar beet production actually did

constrain the output of a processing sector. Also the analyst should consider

whether the model should be modified to reflect the presence of the new teet

processing plant.

Output Impacts of the Drainage Component

The final demands shewn in table 11 were multiplied by the direct plus indirect

coefficients matrix to obtain estimates of the change in total gross output by

sector to obtain the changes expected to result from the drainage oonponent

of Plan A. Table 12 shews the resulting yearly change for years 1-3, table 13

for years 4-8, and table 14 for years 9-12. The annual change shewn for 9-12

can be assumed to continue on into the future for as long as the structure of

the local economy is similar to the I-O model.

Table 12 displays the results of multiplying each element from the construction

sector in the direct plus indirect coefficients table (table 7) by the $1.1

million average change in final demand experienced by the construction sector

for the first 3 years of the project. Notice that total gross output of the

construction sector increases to $1,104,600 which includes the $1.1 million

change in final demand. The additional $4,600 total gross output change is

due to the indirect effects (i.e, the construction sector increases its

purchases fron other sectors which in turn increase their purchases from the

construction sector).

The total gross output change over all sectors that results from the initial

$1.1 million change in final demand for the construction sector is $1,743,970.

That total is the sum of the individual sector changes shewn in table 12. The

total gross output change can also be determined by multiplying the construction final demand multiplier (1.585418 from table 7) by the $1.1 million change

in final donand.

The final denand changes in the livestock and manufacturingsfood sectors that

would be necessary to absorb nev crop production in years 4-8 were shewn in

table 11. These final demand changes are based on the assunption that it is

reasonable to expect both exports and regional processing of the new crop production to increase.

The results of final donand changes for years 4-8 multiplied by the direct plus

indirect coefficients matrix are shewn in table 13. There are four columns of

total gross output changes in this table since there are final demand changes

49
in fcxar different sectors. The bottom line of table 13 (sector totals) could

have been obtained by multiplying the sector final demand change by the final

demcmd multiplier from table 7. It will be instructive for the reader to verify

this for himself.

Note the model's implication, that for the livestock sector to increase its

sales to final demand by $191,500 (table 11) it will purchase $59,000 of additional inputs from the other^agriculture sector, $13,460 from the agriculturalsen/ices sector, etc. Note that the construction and the manufacturing^food

sectors receive the largest inpacts.

Table 14 shews the iirpacts that extend into the future after all construction

generated by the channel work and onfann drainage has ended. For all these

inpcîcts to be valid, one must assume that the manufacturing-food and livestock

sectors were being constrained only by com production.

Table 12—^Average annual total gross output changes by sector for years

1 through 3, drainage component. Plan A, Project X

I-O model sector '\ Annual gross output change

1,000 dollars

Livestock : 0.62

Other-agriculture ;: 2.48

Agricultural-services : 2.85

Mining : 13.04

Construction : 1,104,60

Manufacturing-food : 1.68

Manufacturing-other : 318.23

Manufacturing-wood ;: 16.09

Transportation-finance-insurance- ;

real estate :: 96.83

Retail-wholesale :: 102.67

Services : 84.88

Total gross output change :; 1,743.97

50
Table 13—^Average annual total gross output changes by sector for years 4 to 8^

drainage conponent. Plan A, Project X 1/

I-O iTKXîel

sector

' Livestock * » • » •

Other- :

agriculture :

ODnstruction : Manufacturing-

: food

1,000 dollars

Livestock :\ 214.74 3.20 .34 152.88

Other- :

agriculture ;: 59.00 156.55 1.35 88.50

Agricultural :

services ;: 13.46 15.11 1.55 14.20

Mining ;\ .24 .44 7.11 .74

Construction î\ 3.21 2.07 602.51 9.88

Manufacturing- :

food : 34.75 .87 .92 1,170.21

Manufacturing- :

other : 12.99 9.80 173.58 137.38

Manufacturing- :

wood : .55 1.14 8.78 2.20

Transportation- :

finance- :

insurance-real :

estate : 24.99 13.36 52.82 114.54

Retail- :

wholesale : 16.91 8.32 56.00 67.48

Services : 11.48 8.28 46.30 84.02

Total due to :

each sector's :

final demand :

change : 392.32 219.14 951.25 1,842.03

1/ Total gross output change for each sector is obtained by suiraning across

the rcw. Summing the bottom rcw across shews that total gross output change

for the entire econony is $3,403^990,

51
other Impacts due to the Drainage Conponent of Plan A

New that total gross output changes have been estimated, the analysis can be

extended to estimate changes in any variable that can be functionally related

to total gross output. If the relationship between such items as pollution,

water or land use, and sector gross outputs can be develqped, we can determine

multipliers for these nonmonetary items.

In previous sections, enployment and income multipliers were discussed. During

the development of most I-O models, data are generated that permit one to relate enployment by sector and household income by sector to each sector's total

output.

Enployment

The direct ennployment effects and the enployment multipliers for each sector of

the hypothetical model are shewn in table 15. The direct effects indicate the

fraction of man-years of labor required by a sector for each $1,000 worth of

gross output.

For exanple, the livestock sector has a gross output of $69,134,000 (table 5).

Its total man-years of employment would be 4,217 (.061 X 69,134). It would

take an expanded gross output of about $16,400 for enployment to increase in

the livestock sector by 1 man-year equivalent. These coefficients are based on

the assunption of relatively full utilization of currently enployed labor. If

a sector was known to have significant underemployment at the time of the development of the basic model, use of the direct enployment coefficients is likely

to overstate the direct employment effects of increased output. Some industries may be able to expand output considerably without adding additional employment. The problem can be likened to one of changing labor efficiency.

With high levels of underenployment, output per unit of labor input is lower

than if that labor were fully employed. Use of the direct coefficient assumes

that the labor efficiency that existed when the model was developed will also

exist when output is changed. What in fact may happen is that output per unit

of labor input increases but enployment does not change. In such instances,

the direct effects should be adjusted to reflect the higher output per unit of

input.

The employment multipliers are based on the direct effects and the tables of

direct and indirect coefficients (table 7). 21/ If the economy is plagued by

underenployment, the multipliers will also overestimate enployment effects.

Just like final demand multipliers, the employment multipliers receive their

impetus fron changes in the sector's final demand. The final demand changes

induce changes in gross outputs of the directly impacted sector which in turn

creates inpacts on other sectors. Without these final demand and resulting

gross output changes, the enployment multipliers mean nothing. Just increasing

enployment in a given sector without increasing output will not result in the

21/ Enployment multipliers estimate the total enployment generated in the

economy per a one unit change in employment in a particular sector of the

model.

52
emplcyment changes shewn by the ennployment nultiplier. Furthermore, the employment multipliers must be used with the enplqyment change associated directly

with the final donand change that started the entire process. Use of the emplcyment multiplier with enplqyment changes due to total gross output changes

will lead to overestimation of total orployment effects. The follcwing example

denrtonstrates this point and the use of direct enployment effects.

Table 14—^Average annual total gross output change by sector for years 9 and

beyond, drainage component. Plan A, Project X

I-O model :

sector !

Livestock : Other-

: agriculture

: Manufacturing-

: wood

1,000 dollars

Livestock !! 442.72 6.60 314.32

Other^ !

agriculture !i 121.61 322.65 181.95

Agricultural ;

services !: 27.75 31.13 29.20

Mining ¡\ .49 .91 1.52

Construction ;: 6.63 4.27 20.31

Manufacturing- ;

food !: 71.65 1.78 2,405.88

Manufacturing- :

other j: 26.78 20.19 282.44

Manufacturing- ¡

wood :! 1.14 2.36 4.52

Transportation- :

finance- !

insurance-real :

estate :

Retail- :

wholesale :

51.52

: 34.87

27.54

17.14

235.49

138.73

Services :: 23.67 17.07 172.73

Total due to

each sector's

final danand ! 808.83 451.64 3,787.09

53
The changes in orployment by sector and in total for the average yearly effects

of the drainage component for each of the three time periods are shown in table

16. The employment changes are found by multiplying the man-years of orployment per $1^000 output (direct effects) by the change in output for each

sector. The process is sinple and provides more information than use of the

emplc^Tment multiplier alone.

The same total employment change can be determined with the employment multipliers shown in table 15. For years 1 to 3, the application of the enployment

multiplier is straightforward since only one sector has a change in final demand (see table 11). The change in final demand ($1.1 million) is multiplied

by the direct employment coefficient (.029) for the relevant sector (construction). That multiplication gives the change in employment within the construction sector that is due to the final demand change. The resulting number is

then multiplied by the employment multiplier for the construction sector (2.03)•

The process is:

Step 1

Change in final

demand X

X

Employment/$1,000

gross output

Man-years

.029

Employment change due

to final demand change

1,000 dollars

1,100

Man-years

31.9

Step 2

Bnaplqyment change due

to final demand change

Enployment

multiplier

Total change in

employment

Man-years

31.9 X 2.03

Man-years

64.76

Ihe 64.76 is the employment change in the entire economy and is equivalent to

the 64.807 in table 16 except for rounding differences. If one had not gone

back to final demand but had used the employment effect due to the change in

total output (32.033) times the multiplier he would have overestimated total

employment by about a fourth man-year (32.033 X 2.03 = 65.03). The error is

not great for this sector, but for other sectors it could be much larger.

54
Table 15—^Direct eirployment effects and arployment multipliers

I-O model sector

: Man-years per :

: $1,000 of gross output :

: (direct effects) :

Enployment multipliers

Livestock : 0.061 1.80

Otheragriculture : .061 1.35

Agricultural

services : .021 2.40

Mining : .067 1.33

Construction ! .029 2.03

Manufacturingfood :': .022 2.82

Manufacturing- !

other !: .052 1.70

Manufacturing- :

wood !: .044 1.50

Transportation- :

finance- ;

insurance-real :

estate : .025 1.59

Retail- !

wholesale : .065 1.20

Services ; .062 1.32

Use of the enployment imltipliers for the next two time periods is conplicated

by the fact that more than one sector's final demands are affected. Since the

procedures for the next two time frames are similar, only time period tvyo will

be demonstrated. Once again, one must go back to the changes in final demands

that started the process. The procedure for the second time period, years 4-8,

is summarized below:

55
Table 16—Employment changes due to drainage component. Plan A

Sector

Direct :

employment

effects :

Average yearly change

for years 1-3 Â/

Average yearly change :

for years 4-8 2J \

Average yearly change

for years 9 and beyond 3^/

Gross output : Employment Gross output : Employment : Gross output : Employment

Man-years/

$1,000 output $1,000 Man-years $1,000 Man-years $1,000 Man-years

Livestock 0.061 0.62 0.038 371.16 22.641 763.64 46.582

Otheragriculture .061 2.48 .151 305.40 18.629 626.21 38.200

Agricultural

services .021 2.85 .060 44.32 .931 714.29 15.000

Mining .067 13.04 .874 8.53 .572 2.92 .196

Construction .029 1,104.60 32.033 617.67 17.912 31.21 .905

Manufacturingfood .022 1.68 .307 1,206.75 26.549 2,479.31 54.545

Manufac turingother .052 318.23 16.548 333.75 17.355 329.41 17.129

Manufacturingwood .044 16.09 .708 12.67 .557 8.02 .353

Transportâtionfinanceinsurancereal estate .025 96.83 2.421 205.71 5.143 314.55 7.864

Retailwholesale .065 102.67 6.674 148.71 9.666 190.74 12.398

Services : .062 84.88 5.263 150.08 9.305 213.48 13.236

Total :

emplo3mient — — 64.807 — 129.260 — 206.408

\_l Information for column 2 is from table 12. Column 3 is column 1 x column 2.

Tj Information for column 4 is a summation of each row in table 13. These figures represent total gross output change if all

final demand changes discussed actually occur. Column 5 is column 1 x column 4.

3/ Information for column 6 is a summation of each row in table 14. Column 7 is column 1 x column 6.
step 1

Final demand Direct eitployment

Eirployment change

due to final demand

Sector change X coefficient change

1,000 dollars Man-years

Livestocik 191.5 X .061 = 11.6815

Otheragriculture

Construction

147.5

600.0

X

X

.061

.029

= 8.9975

17.4000

Manufacturingfood 980.9 X .022 _ 21.5798

Step 2

Sector

Eroployinent change

due to final

detiand change

Man-years

X

Enployment

multiplier

Total eirployment

change

Man-years

Livestock 11.6815 X 1.80 21.027

Otheragriculture

Construction

8.9975

17.4000

X

X

1.35

2.03

12.147

35.322

Manufacturingfood 21.5798 X 2.82 60.855

Total enploynient change/ all sectors 129.351

If enplqyment changes related directly to total output changes were used with

the multipliers of the final deinand related changes, overestimation would have

been more serious than for time period 1. For example, the eirployment change

in the manufacturing-food sector would have been 25.790 man-years (1,172.28

(table 13) X. 022). Then, multiplication of that by the multiplier would have

resulted in a total employment change of 72.73 man-years coirpared to the

correct change of 60.86. Errors would have been made in the other sectors as

well, resulting in an estimated total enployment change of 144.7 man-years

or about a 12-percent overestimate.

It has been shewn that use of the direct labor coefficients or the orployment

multipliers give the same total enployment effects. The first method, which

used the direct enployment effects along with the individual sector outputs,

generates more information as to the distribution of the enployment inpacts

than use of multipliers alone. Access to the conplete I-O model (or at least

a conplete array of its output) is necessary for estimating the distributional

inpacts. The nultipliers by themselves are useful, but are not nearly as useful as the conplete model.

57
Income

The impact of the drainage cornponent on household income is estimated in a way

similar to ortployment. The proportion of each sector's expenditures going to

households serves as the direct household effects for the model. Ihese direct

income effects along with the income multiplier for each sector are shown in

table 17.

Once the total output change for each sector due to a given change in final

demand is determined (tables 12-14), the individual sector incase impacts can

be estimated. The procedure is the same as that described for employment

except that the income coefficients are used. The income effects for each of

the three time periods are shewn in table 18. This kind of information would

he useful for filling out the account displays in Principles and Standards.

From these data, one can see that incone in agriculture is not significantly

affected until the second time period. One can also see v*iich sectors receive

the largest income inpacts.

Table 17—Direct income effects and income multipliers

Sector ! Direct incone

: effect

: Incone

: multiplier

Livestock : .254 2.269

Other-agriculture : .364 1.455

Agricultural services : .307 1.610

Mining : .442 1.358

Construction : .263 1.743

Manufacturing-food ': .135 2.858

Manufacturing-other : .278 1.821

Manufacturing-wood j! .386 1.421

Transportation-finance- :

insurance-real estate : .370 1.352

Retail-wholesale ': .395 1.278

Services ;: .414 1.389

58
Table 18—Income changes due to drainage component. Plan A

Sector

Direct

income

effects

Average yearly change

for years 1-3 i/

Average yearly change

: for years 4-8 U

: Average yearly change

: for years 9 and beyond _?./

Gross output : Income : Gross output : Income : Gross output \ Income

$1/$1 output 1,000 dollars

Livestock .254 .62 .157 371.16 94.275 763.64 193.965

Otheragriculture .364 2.48 .903 305.40 111.166 626.21 227.940

Agricultural

services .307 2.85 .875 44.32 13.615 714.29 219.287

Mining .442 13.04 5.764 8.53 3.770 2.92 1.291

Construction .263 1,104.60 290.510 617.67 162.447 31.21 8.208

Manufacturingfood .135 1.68 .227 1,206.75 162.911 2,479.31 334.707

Manufacturingother .278 318.23 88.468 333.75 92.783 329.41 91.576

Manufacturingwood .386 16.09 6.211 12.67 4.891 8.02 3.096

Transportationfinanceinsurancereal estate .370 96.83 35.827 205.71 76.113 314.55 116.384

Retailwholesale .395 102.67 40.555 148.71 58.740 190.74 75.342

Services .414 84.88 35.140 150.08 62.133 213.48 88.381

Total income

change — — 504.637 — 842.867 — 1,360.547

\l Information for column 2 is from table 12. Column 3 is column 1 x column 2.

2J Information for column 4 is a summation of each row in table 13. These figures represent total gross output change if all

final demand changes discussed actually occur. Column 5 is column 1 x column 4.

Zj Information for column 6 is a summation of each row in table 14. Column 7 is column 1 x column 6.
The inconie multipliers permit estmation of the total incone effects^ but not

the individual sector effects. As with the employment multipliers, the income

multipliers must be applied to the change in incone due to the change in final

demand. Use of the incone multiplier is demonstrated below for time periods

1 and 2.

Time Period 1

Step 1

Sector

Final denand

change

Direct household

X income coefficient

Income change due to

= change in final deniiand

1,000 dollars 1,000 dollars

Construction 1,100 X .263 289.3

Step 2

Incone change due to

Sector change in final demand

Incone

X multiplier

Total change in

incone in $1,000

1,000 dollars 1,000 dollars

Construction 289.3 X 1.743 22/ 504.25

Time Period 2

Step 1

Final denand Direct. household IncomeÏ change due to

Sector change X income coefficient change

1,

in final deiïiand

1,000 dollars 000 dollars

Livestock 191.5 X .254 ::: 48.641

Otheragriculture 147.5 X .364 = 53.690

Construction 600.0 X .263 = 157.800

Manufacturingfood 980.9 X .135 132.422

22/ Except for errors introduced by rounding, this number is equivalent to

the total of column 3, table 18.

60
step 2

Sector

IncoTie change due to

change in final demand X

1,000 dollars

Livestock

Otheragriculture

Construction

Manufacturingfood

48.641

53.690

157.800

132.422

X

X

X

X

Total inccxne change

Supply Constrained Industries

Income

multiplier

2.269

1.455

1.743

2.858

Total change

in income

1^000 dollars

110.37

78.12

275.05

378.46

23/ 842.00

The (quantity of any connodity sold in the market is jointly determined by demand and supply. A basic assumption underlying static I-O analysis is that

both supply and denand are conpletely elastic. This implies that additional

inputs are forthcoming at a constant price and that any quantity of product

can he sold with no effect ai price.

With regard to supply, it is generally true that the econorry's total output or

the output of an individual industry cannot expand indefinitely because of the

scarcity of one or more of its inputs.

The potential output of a resource constrained sector can be estimated by divic3-

ing the resource supply by the direct resource requirement coefficient for that

sector, ihis coefficient may be for water or land, or sane other resource (for

example, the acre-feet of water used in the production of $100,000 gross output

of a given crop). The coefficient must be generated independently by the 1-0

analysis. Once the potential output is estimated, the 1-0 model can be used

to examine the effects of the resource constraint on the econony. The beneficial effects of projects to alleviate the resource constraint can be evaluated.

If the resource constraint restricts output in only one sector, determining the

impacts are fairly straightforward. There are several ways that the constrained

output might be used in the economy. The simple case cx:curs v*ien most of the

output of the constrained sector would go directly to final donand. All the

output cannot be available for final demand since the given sector often requires some additional production from within itself for any expansion of its

output. To determine the amount available for final demand, divide the potential output by the sector's diagonal coefficient (v^ere the subject sector is

both selling and buying fron itself) in the direct plus indirect coefficients

table. This yields the amount of output available for final demand. Since the

23/ Except for errors introduced by rounding, this nun±)er is equivalent to

the total of column 5, table 18.

61
diagonal coefficients are always greater than or equal to one^ the amount

available for final demand will be less than or equal to the potential output.

The difference between output sold to final demand and total output is the

sector's own output required as an input in the production of its total output

and the output which it must sell to other expanding sectors.

When more than one sector is constrained by the limiting resource the diagonal

coefficients and all the coefficients in the direct plus indirect coefficients

table where each constrained sector intersects another constrained sector are

used in estimating final donand. A smaller matrix is made of these coefficients^ inverted^ and premultiplied by the constrained outputs. The result is

a vector of available final demands for each constrained sector. These final

demands, when multiplied by the direct plus indirect coefficients, will show

the outputs in every sector, the total output of the constrained sectors being

exactly the same as determined earlier by the resource constraint. This procedure assumes that the constrained outputs will go largely to the final demands of the respective sectors.

The procedure for a single constrained sector can be applied to the hypothetical drainage component of Plan A. Suppose that, due to a water constraint, it

is possible for the other-agriculture sector to increase output by only

$40,000. The total impact of that $40,000 potential change in total output

(not final denand) can be estimated with the use of direct plus indirect coefficients table, but only with some adjustments. Since the other-agriculture

sector can only increase by $40,000, it is necessary to determine how much final

demand would draw forth the full $40,000 of potential output. The interaction

term of the direct plus indirect coefficients table indicates how much total

gross output is required to support $1 of final dennand for that sector. For

the other-agriculture sector, $1.06 (table 7, column 2) of total gross output

is required for $1 of final demand. Conversely, about $.94 sold to final demand will generate $1 total gross output. Since the feasible new gross output

($40,000) is known, dividing it by the interaction term, 1.061348, fron table

7 gives the final demand, $37,688, implied by $40,000 gross output. Itie constrained increase in output ($40,000) has been converted to final denand

($37,688) and can be used along with the direct plus indirect coefficients

table as explained previously. Total gross output of the economy would increase by $55,991 24/ due to the constrained total output increase of $40,000

in the other-agriculture sector. 25/

24/ 1.485655 (final demand multiplier) X $37,688 = $55,991.

25/ Another way of achieving the same result is to divide each coefficient

in the relevant column of the direct plus indirect coefficients table by the

appropriate interaction term (1.061348 in this example). The resulting column

can then be multiplied by the $40,000 directly. The summation of the column

provides a multiplier which can be used directly against gross output rather

than final demand (7) (16), i.e., 1.485655/1.061348 = 1.399781. The procedure

gives the same results since 1.399781 X $40,000 = $55,991.

62
Display of Impacts of Plan A in Principles and Standards Accounts

Beneficial and adverse effects of the channel construction and drainage component of Plan A were evaluated in the previous sections using I-O analysis.

The analysis of project effects was divided into three time periods: (1) project installation^ (2) transition activities as local fambers prepared to take

advantage of the project and began to realize some of its benefits^ and (3) the

time following conplete project installation when all benefits attributable to

the project were fully realized.

The regional increase in output^ enplcyment^ and income impacts of the project

for each time period have been displayed in the regional developrïent account in

Appendix C. 26/ In the social well-being account presented in Appendix C, employment and mcane effects within the region are further distributed among inccme and enplcyment groups. Displays were not prepared for the environmental

or the national econcanic developniient accounts. The national econanic development account was not prepared because of problems of evaluating and identifying

irnpact elements that represent tradeoffs among regions, which were not addressed

in this report. Ihe sum of the econanic effects of Plan A across all regions

would equal the values for the same effects shewn in the national economic

developnnent account. Thus, in many cases, beneficial effects shewn as accruing

to the project region may be partially or largely offset by negative effects in

the remainder of the Nation.

For the display of impacts in Appendix C, direct effects are defined to be

changes in final demand. This definition is not consistent with standard 1-0

terminology of direct effects. In an 1-0 model, the direct effects refer to

the direct purchases of the sector whose final demand changed. The initial

change in the final demand of that sector might also be included as part of

the direct effects.

Use of 1-0 Models for Projections and Determining Planning Strategies

Many things that relate to an econany change over time. Technology and regional trade patterns are two items that can create problems for static 1-0 models.

Since most 1-0 models are static, they reflect the technology and trade flews

existing at the time the model was developed. Technology changes might alter

the sectors from which a given industry makes its purchases as well as the

amounts of those purchases. The more dynamic the industry the more likely it

is that technology changes will affect the validity of the model.

One of the activities that faces most planning efforts is projecting plan impacts into the future. The 1-0 model can aid such an exercise if it is used

prcperly. The analyst has several estions for handling structural change.

26/ More detailed 1-0 models with sophisticated inpact analysis routines

may become feasible as more information is developed about the relationship

between industry output and employment, income, various pollutants, etc. This

1-0 may eventually be useful in generating iirpact information for the environmental quality account and social well-being account as well as for the economic developnent accounts

63
Dynamic I-O models incorporate econometric relationships that adjust for future

time periods. Another way of mitigating the problem is to run separate 1-0

models for different time periods with the direct coefficients altered to reflect technology changes. Sensitivity analysis can be performed on individual

coefficients that seem likely to change. Sane coefficients can change significantly without affecting the model results significantly. If the model is sensitive to changes in certain coefficients^ the future value of those coefficients will merit special attention.

The effects of changing regional trade flews on a regional 1-0 model are much

the same as changes in technology. If a particular region's economy becomes

more highly developed through time, it is likely to depend less on imports than

it did in the past. Use of a static 1-0 model prepared for an earlier period

may then underestimate the direct and indirect effects of given sectors on the

local economy. It could also be that an economy could become more dependent on

the outside economy and thus the static 1-0 model would overestimate the

effects. Correction of this problem could follow the same course as the technology problem. For either reason, changing technology or changing regional

trade flows, one must use caution in drawing conclusions about future inpacts.

Nonrecognition of this problem could lead to some very misleading if not

totally incorrect policy or plan prescriptions.

Imprcçer implications can be drawn from 1-0 models and multipliers. For example, just because one sector has a higher multiplier than another does not

mean that it is more inportant. A high multiplier merely indicates a high

level of economic interdependence. The direct coefficients and the multipliers

say nothing about the relative size one sector coipared to another. However,

information that must be assembled to arrive at the transactions table does

tell a great deal about the size of sectors and their importance in the economy.

This is the advantage of having a cannplete 1-0 model versus only multipliers.

If an economy is dominated by one sector and that sector tends to be unstable

the regional econcm/ is likely to be unstable. Policy prescriptions then might

include attempting to improve other sectors that do not have the instabilities

of the dominating sector. Examination of the relative size of multipliers does

provide an indication of which sectors might provide more total overall growth

in the economy for given levels of final demand expansion. The degree to which

final demand can be expanded must be considered also.

64
CHAPTER VI. GENERAL APPLICATION OF I-O ANALYSIS AND ITS MULTIPLIERS

by John Wilkins

This chapter illustrates the use of 1-0 final demand imiltipliers in evaluating

typical natural resource projects. All of the examples presented are hypothetical and have been developed to point out specific problenns which occur with

1-0 analysis. Final demand multipliers^ 27/ the most comnon multiplier generated from 1-0 models, shew the total expansion of output in all industries as a

result of $1 worth of goods or services delivered to final demand 28/ by a

single industry in the model.

Preparing Project and Program Benefit and Cost

Estimates for Multiplier Analysis

Several cautions and procedures should be kept in mind before applying final

demand multipliers or any 1-0 multiplier in project analysis.

(1) 1-0 and its final demand multipliers are applicable

only to transactions which can be made through the market

place. Increased livestock production or electricity

use are examples of market transactions. Even though

nonmarket benefits and costs are sometiines assigned dollar

values in benefit-cost estimates, they should not be

evaluated with multipliers. They create no actual dollar

impacts in markets. Examples of nonmarket estimates are

opportunity costs and esthetic benefits which may have

been assigned a dollar value.

(2) Multipliers should be applied to gross changes in benefit

and cost figures, not just to net figures. For example,

the total sales value of an extra bushel of wheat, not

just the net value over costs, causes indirect econanic

activity in other sectors of the econony. Table 19 shows

that using net benefits underestimates indirect economic

impacts. In this case, the $450,000 represents only the

net income of increased crop output, whereas $1.75 million

is the full sales value of increased crop production. Gross

revenue is the proper variable to evaluate.

277 Final donand multipliers will be referred to simply as multipliers.

28/ Demand in the 1-0 context is of two types. Final demand is final or

terminal disappearance of goods or services in the form of exports, government,

capital formation, or household consumption. Intermediate demand is goods or

services purchased for further processing prior to sale to final demand.

65
Table 19—Estimation of indirect economic inpacts, using net

benefits and gross benefits

; Net benefits î: Gross benefits

I-O model ;: Change : Change : Change : Change

sector : in final : in gross : in final : in gross

: demand : output :: demand : output

1^000 dollars

Livestock ;: 1/ 450 10 37

Other- Î

agriculture ; 478 1,750 1,859

Agricultural ;

services : 46 179

Mining 1 5

CŒistruction î 6 25

Manufacturing- :

food 3 10

Manufacturing- :

other 30 116

Manufacturing- :

wood 3 14

Transportationfinanceinsurance-real

estate 41 158

Retail-wholesale 25 99

Services 25 98

Total : 450 668 1,750 2,600

1/ See item 12 of this section for procedures for reducing gross output

to Tinal demand.

66
(3) Project and program benefits and exists are both treated

in the same manner in multiplier analysis. Just as an increase in crop production can bring on indirect econannic

activity in other sectors^ so too can construction expenditures. Thus/ the indirect effects of both benefits

and costs can be treated as beneficial economic activity

in the regional development account, following Principles

and Standards/ because both increase regional econonic

activity. Benefit-cost analysis seeks to classify money

flews as adverse or beneficial. Multiplier analysis,

hcwever, deals with estimates of the indirect economic

activity associated with those money flews.

(4) An e5C)enditure, regardless of source, creates direct and

indirect economic inpacts in the evaluation area. If construction funds are obtained from out of the region under

construction, they may be analyzed with multipliers with

fev adjustments. However, if local people tax themselves

to supply construction funds (either in full or to match

funds under a cost sharing plan) their spending in other

areas should be reduced accordingly, and analyzed to obtain

offsetting negative multiplier effects.

(5) Multipliers, like their parent I-O models are best used to

analyze small changes in final demand. Large changes in

final demand, such as those equal to half or more of sectoral

gross output, are likely to change production technology and

the input structure enough to change the multipliers.

(6) Production decreases or negative changes can also be used

with multipliers and I-O. A production decrease times a

multiplier provides an estimate of indirect negative effects.

(7) Multipliers shew the indirect economic outputs from what

are called backward linkages. That is, they shew the inputs

behind or supporting production of a unit of output prior

to its entering final demand. Multipliers do not show

feward linkages after production is conplete. Ihe indirect

economic effects of an increase in crop production will

shew backward-linked inpacts on the demand for fertilizer,

machinery, labor, etc., but not forward-linked inpacts

(after the crop is sold) such as transportation, storage,

processing, and retailing. Furthermore, multipliers and

I-O will not shew changes in the structure of the economy,

such as diversification or externalities, as a result of a

production change.

(8) It is inportant to choose the correct industry or sector

in which to analyze the primary economic impact. Tb do

so correctly requires a familiarity with I-O theory and

with trade flews of the economy under construction. For

exanple, there is usually no outdoor recreation sector or

67
multiplier in I-O iTKxîels. Recreation expenditures are

felt initially in trade and service sectors^ reflecting

purchases of food^ licenses^ gas or lodging. Increased

crop production, if exported, would initially impact the

economy in the crops sector. If processed locally, it

would probably impact in a food processing sector. The

analyst must consider each situation and decide upon the

proper initial impact sector.

(9) A related matter is that of new or nonexistent sectors.

If an undeveloped region under evaluation finds itself

with a new steel plant, there will be no historical basis

on which to use an existing regional multiplier for local

impact estimates. In this case, a multiplier from sonne

other region with a similar econonic structure and having

a steel plant of similar technology could be used. Along

the same line, a dryland crops multiplier is not adequate

for estimating the indirect econanic impacts of crop production fron a new irrigation project in the region. In

the case of an 1-0 model, an irrigated crops sector could

be added.

(10) Project costs and benefits are often composed of several

items which can be analyzed using multipliers from several

sectors if that level of detail is available. An irrigation project, for example, may entail construction costs

evaluated using the construction multiplier; pumps using

a machinery sector multiplier; self-propelled irrigation

sprinkler systems using the farm machinery multiplier;

and increased electricity use utilizing the electric

utilities multipliers. The 1-0 model sector definitions

and Standard Industrial Code (SIC) categories should be

examined if there are questions with regard to proper

sectors.

In table 20, a hypothetical project costing $25 million

is analyzed for indirect effects, using a general or one

sector approach on the left side of the table and a more

detailed or four sector approach on the right side of the

table. In this hypothetical case, impacts are greater

using the one sector general approach. However, this

will not always be the case. The detailed approach is

better than the general one sector approach if the breakdown into conponents and sectors yields a more accurate

picture of the initial distribution of costs and benefits

than would existing row coefficients in a one sector

approach. The detailed or multisector approach is probably

superior to the single sector general approach because it

permits an approach more tailored to the specific problon.

(11) Increased wholesale and retail sales are not generally

valued at full sales value in 1-0 models. Rather a

markup or sales margin value is used. This policy is in

68
Table 20—-General one sector versus detailed multisector

analysis of a project

One sector ;: Severa]L sectors

I-O model :

sector :

Change

in final

demand

: Change :

: in gross :

: output :

; Change

; in final

: .demand

: Change

: in gross

: output

1,000 dollars

Livestock : 14 17

Other- :

agriculture \ 57 39

Agricultural :

services : 65 35

Mining 296 84

Construction :: 25,000 25,104 6,000 6,187

Manufacturing- :

food : 38 76

Manufacturing- :

other 7,232 3,598

Manufacturing- î

wood 366 8,000 8,968

Transportation- :

financeinsurance-real

estate 2,201 2,856

Retail-wholesale 2,333 9,000 10,313

Services 1,929 2,000 3,714

Total : 25,000 39,635 25,000 35,887

69
accord with the national and most State I-O models. The

markup represents the cost of selling the item^ and is the

difference between what the sales outlet pays for the iten^

and what it sells it for. Further clarification on this

point is found in a BAE publication (54):

In the national input-output model, corunodities

do not flow through the trade sectors to final

demand, even though much of the actual flew does

follcw this path. Instead, trade final demand is

represented by the gross trade margin which is

equal to the difference between sales and the cost

of the goods. Ihe goods themselves flew from the

last manufacturing stage directly to final demand.

This characteristic of the national input-output

model (found also in many regional models) requires

that trade final demand changes be transformed from

a sales basis to a gross trade margin basis. A

factor, based on national relationships, can be

calculated to represent the ratio of gross trade

margin to total sales. This gross trade-margin

for 1967—the year of the national input-output

model—is given by:

Total wholesale & retail output ^ $163,365,000 = 21

Total wholesale & retail sales $767,690,360

This means that the gross trade margin—the required

final demand—is equal to 21 percent of the estimated

change in sales by trade. The approximation of the

gross trade margin, using national aggregate data,

may be useful in circumstances where study economies

do not permit a more detailed analysis. However, this

measure has shortcomings: (1) it does not differentiate

between types of retail and wholesale establishments,

and (2) it does not take into account the potential

regional inpact associated with the production of

local goods.

Therefore, when applying a multiplier to a wholesale or retail

sales increase, reduce the sales increase to the markup before

multiplying by the multiplier. Using the full sales value

overstates iirpacts considerably.

Table 21 danonstrates the results of three methods of handling

sales. Column 2 of the table shews output results when the

full value of sales is entered as a trade final demand change.

This demonstrates the overestimation of indirect output impacts,

70
Table 21-Indirect output impacts of increased sales valued at sales value and at mark-up

I-O model sector

Livestock

Other-agriculture

Agricultural

services

Mining

Construction

Manufacturing-food

Manufacturing-other

Manufacturing-wood

Transportationfinance- insurancereal estate

Retail-wholesale

Services

Total

Full sales values

Change

in final

demand

7,000

7,000

Change

in gross

output

4

6

4

1

52

26

315

4

962

7,165

570

9,109

Mark-up of imported goods

Change

in final

demand

Change

in gross

output

1.000 dollars

II 1,470

1,470

1

2

1

0

11

5

66

1

202

1,505

120

1,914

Mark-up of local goods

Change

in final

demand

1/ 5,530

2/ 1,470

7,000

Change

in gross

output

6

28

11

19

51

19

8,352

24

753

1,790

461

11,514

-1/ Full sales valuTV^ÖÖön^^rU-up ($1,470) ^ ouFput of manufacturing (other) $5.530. Assumes no other primary effects.

\l Mark-up of 0.21 (aggregate national mark-up) x $7,000 - $1,470.
The correct niethod of estimating the indirect output

inpacts of increased sales is shewn in the coluinns 3

and 4, where only the rnarkup is entered, a change in

trade final denand. In this case, the goods sold are

assumed to be inported from outside the region. Columns

5 and 6 assume that the goods sold in the trade sector

are manufactured within the region. This is shewn by

the $5,530 in the manufacturing-other sector.

(12) A pertinent question is whether a change in the output

of a sector should be considered (from an I-O view) as a

change in gross output or as a change in final demand. 29/

The question arises because 1-0 responds to demand changes,

but most resource development projects are oriented to

increasing supply or output. The question is one of reconciling demand and supply. If the change is considered

to be a change in gross output, then it must be reduced

to a final demand level in order to multiply it by a final

demand multiplier. Failure to reduce it results in an

overstatement of indirect econonic inpacts. If the change

in the benefit or cost is, indeed, a final demand change,

then no reduction is necessary prior to multiplier analysis.

It would appear the exogenous or demand changes from outside

the area are final demand changes. On the other hand, if

the change is an output or expenditure increase, it could

be classed as either a final demand or a gross output change,

but most likely is a gross output change.

Table 22 shews the effects of failing to reduce an output

figure to final demand prior to 1-0 analysis. The manufacturing-^wood sector is assumed to increase by $1 million

gross output. On the right side of the table, it has been

reduced to its proper final demand level, as shewn in the

footnote to table 4. Indirect inpacts are overestimated

by $144,400 when the gross output figure is used as if it

were a change in final demand.

(13) It is not appropriate to do a multiplier analysis on project

outlays for land. The case is similar to trade-in, secondhand goods. Ownership changes but no new production results.

Changes in productivity of the land as a result of a use

change are appropriate for multiplier analysis.

(14) The Principles and Standards list increased efficiency as a

beneficial effect. Technical efficiency could be defined as

producing a given quantity of output with fewer inputs, or

as producing additional output with the same amount of inputs. Efficiency can be evaluated with I-O models by manually

reducing appropriate technical coefficients to represent fewer

29/ Also, see Chapter V.

72
Table 22—Direct and indirect iiipact estimates from a change in gross output

and from a change in final demand

: Change in gross output level j: Change at final demand level

Sector \

: Change :

in final :

: demand :

Change :

in gross :

output :

: Change ;

; in final

: demand

: Change

: in gross

: output

1,000 dollars

Livestock 0,3 0.3

Others Î

agriculture 1,1 1.0

Agricultural ;

services 1.5 1.3

Mining 1.3 1.2

Construction 7.2 6.5

Manufacturing- :

food 1.1 0.9

Manufacturing- :

other 152.2 137.2

Manufacturing- ;

wood : 1,000 1,109.2 1/ 901.5 1,000.0

Transportation- :

finance- :

insurance-real :

estate ; 93.1 83.9

Retail- :

wholesale : 57.6 51.9

Services J 41.8 37.7

Total :\ 1,000 1,466.4 901.5 1,322.0

1/ 1,000,000

1.109258 (direct-indirect coefficient manufacturing-wood sector) =

$901,503,527 - final deinand.

73
inputs for a constant level of output. Ihis coulc3 be

carried out in I-O analysis utilizing "with" and "without"

I-O iTKx3els. The "without" model is the original niodel.

The "with" model is the original after a technical coefficient or interindustry transaction has been decreased

to reflect an efficiency change. After changing the

coefficients, the model can be inverted to obtain new

indirect plus direct coefficients and multipliers.

In table 23, columns 1 and 2 shew the indirect effects of

an increase in final demand in the manufacturing-other

sector in a "without" matrix. Columns 3 and 4 show the

indirect effects in the "with" matrix where purchases of

the manufacturing-other sector fron the manufacturing-wood

sector were reduced to nearly zero, representing fewer inputs or an efficiency increase. In this case, a more

efficient use of inputs set free $539,000 of inputs which

could be used elsewhere in the economy. Efficiency reduces

economic ijnnpacts if it is assumed that the inputs saved are

not used elsewhere. Efficiency may reduce prices of production inputs as a result of decreased demand for the input.

Evaluating efficiency in the absence of a "with" and "without"

model or merely as a production change overstates the indirect

impacts, because the technical coefficients assume a fixed

relation between output and input mix.

(15) I-O models represent transactions for a 1-year period in time.

Therefore, benefits and costs must be evaluated on a 1-year

basis. Long-tenn cost and return streams can either be

averaged or discounted at prevailing interest rates to an

average annual basis before multiplier or I-O analysis. If

a structure is to cost $60,000 and take 3 years to install,

then the yearly cost is $20,000, or $22,498 if amortized at

6 1/8 percent interest for 3 years. An alternative procedure

is to analyze costs or returns in a future year I-O model and

then discount resulting indirect effects to present value.

However, future yield or projected I-O models are not as reliable as recent I-O models. 30/

(16) One could estimate indirect economic effects in two kinds of

time frames. Benefits and costs could be evaluated as they

actually occur over time. During the construction period,

only construction expenditures may be generating indirect

effects. If the project were analyzed after construction

was complete, only the benefits may be generating indirect

effects. It is likely that benefits and costs will occur at

different times. For example, a project may be in the construction stage for 3 years with no benefits accruing. On

the fourth and following years, benefits may be caning forth

and construction expenditures may have ceased.

30/ See the discussion of the time dimension of the evaluation problem

in Chapter V.

74
Another view would be to look at costs and benefits from

an average annual viewpoint over an evaluation period.

Since this involves an interest rate and averages, it is

a departure fron real world money flews. Nevertheless,

nost agency econanic analyses are on an average annual

basis. Ihis approach should be used with cautioi in I-O

analysis.

Table 23—Estimation of the indirect effects of efficiency

Original matrix :: Modified efficiency matrix

Sector I Change :

in final :

; demand :

Change î

in gross :

output :

; Change

; in final

: demand

: Change

: in gross

: output

1,000 dollars

Livestock : 100 100

Other- :

agriculture 478 • 477

Agricultural

services 178 177

Mining 342 342

Construction 728 728

Manufacturingfood 252 251

Manufacturingother : 100,000 149,825 100,000 149,769

Manufacturingwood 424 16

Transportationfinanceinsurance-real

estate 9,640 9,606

Retai 1-ivholesale 5,168 5,146

Services 6,181 6,165

Total : 100,000 173,316 100,000 127,777

75
The general rules for t±ie use of I-O multipliers are: only goods and services

sold in a inarket are apprcç>riate for multiplier analysis; net values (except in

sales) should not be used; all output values should be reduced to final demand;

and a multisector approach is superior to a single sector approach.

Multiplier Use in Functional Canponents

1-0 models are more accurate than aggregate multipliers; however^ multipliers

are more readily available. Therefore, multipliers should be used when 1-0

models are not available, recognizing the preceding cautions. This section

provides general guidance in the use of multipliers in several areas of water

resource development or water derived services. All different situations concerning benefits and costs cannot be anticipated and explained, but an an

attenpt is made to discuss a variety of situations. Several hypothetical

examples are presented. The final demand multipliers used in this section do

not correspond to earlier chapters of the text.

Irrigation

Costs. Costs of irrigation land development often include several activities—

water storage and distributicn facilities, brush clearing, leveling, drainage,

punp or canal installation, and sprinkler pipe purchases. Construction costs

are evaluated in the construction sector. If a farmer does land clearing, the

cost may be evaluated in an agricultural sector. If construction companies

clear land, the construction multiplier should be used to estimate inpacts.

Costs of these activities must be adjusted as described in the previous section,

and then the separate corponents multiplied by the appropriate sectoral multipliers. Structure installation costs are usually a one time occurrence.

Operation and maintenance costs continue through the project life.

Benefits. The estimated average annual value of increased crop production can

usually be directly multiplied by the crop multiplier. However, it should be

reduced to final demand first. Crqp output generally begins to accrue after

project construction is corplete, and then levels off. This incorie stream can

be evaluated, as it is expected to actually occur in a given year, or it can be

averaged and discounted back to the present. Average annual costs and benefits

must be based on the same interest rate and evaluation period.

Example. Assume an irrigation project is being built which involves construction of a dam, a reservoir on forested land, and a water distribution system.

It also involves clearing rangeland for flood and sprinkler irrigation. The

output of the project will be rcw crops to be processed locally and grain crops

to be exported from the region.

Average annual costs are estimated at $1.25 million. Average annual benefits

are estimated to be $1.7 million. Initiating multiplier analysis of the

project requires that the costs and benefits be separated into corponents.

Annual costs may be broken down in a project report in a form such as the

following:

76
Dam, reservoir, and distribution system construction

costs $ 800,000

Reservoir land acquisition costs 50,000

Operation and maintenance costs 100,000

Land clearing costs 250,000

Sprinkler pumps and pipes 50,000

$1,250,000

Estimates of the indirect effects of each compDnent might proceed as follows:

Construction costs:

$800,000 X 1,230 (construction final demand multiplier) =

$984,000 (total change in output) resulting in $184,000 31/

of indirect output effects. This is the general approach to

project evaluation as discussed earlier. A detailed approach

would be better.

Reservoir land acquisition costs:

$50,000 not subject to multiplier evaluation. However, cutting

and selling standing timber on the reservoir site has an estimated

value of $5,000. $5,000 x 1.379 (logging contractor final demand

multiplier) = $6,895, resulting in $1,895 indirect impacts.

Operation maintenance and repair costs:

Assume that half of these costs are for administration and half

are in the form of maintenance construction. $50,000 x 1.270

(government final demand multiplier) = $63,500, resulting in

$13,500 of indirect impacts. $50,000 x 1.391 (maintenance construction final demand multiplier) = $69,500, resulting in

$19,550 of indirect impacts.

Land clearing costs:

Assume in this case that land is cleared by construction contractors and equipment, and that the overall construction

sector multiplier is used. $250,000 x 1.230 (construction

final demand multiplier) = $307,500, resulting in $57,500 of

indirect impacts.

Sprinkler punps and pipes costs:

Assume this equipment can be purchased locally. $50,000 x

1.240 (farm machinery final demand multiplier) = $62,000,

resulting in $12,000 of indirect impacts.

Benefits:

The project involved irrigated crops on former rangeland.

Range livestock production could then be assumed to decrease

by $250,000 yearly. Decreased livestock sales of $250,000 x

1.671 (livestock final demand multiplier) = $417,750 v^ich

results in negative indirect impact or cost of $167,750.

31/ The change in final donand times the final demand multiplier equals

the total change in output. Total change minus the change in final demand

equals the indirect output effects.

77
A row crop production increase of $1 million might create

a $1.5 million increase in the local food processing

sector. $1.5 million x 1.601 (food processing final demand

multiplier) = $2,401,500, resulting in $901,500 of indirect

impacts. Chapter V offers a more detailed discussion of

this technique.

The increase in grain production could create an increase

of $700,000 in grain exported fron the region. $700,000 x

1.555 (irrigated grain crops final demand multiplier) =

$1,088,500, resulting in $388,500 of indirect impacts.

This example of multiplier analysis could be summarized as follows:

Average annual costs $1,250,000

Average annual benefits $1,700,000

Net indirect output $1,410,695

Drainage 32/

Costs. The recommendations and example pertaining to irrigation are generally

applicable to drainage.

Benefits. Drainage benefits would be treated much like irrigation benefits.

If land use changes are involved, production losses as well as production

gains fron the change should be evaluated.

Land Treatment

Costs. Costs are handled much like irrigation and drainage costs. If a

government agency carries out the land treatment itself as a part of its normal

operations, the costs could be evaluated with a government multiplier, if

available. If not, the costs could be broken into conponents and evaluated

with separate sectoral multipliers.

Benefits. Land treatment benefits could be in the form of increased crop or

livestock output because of increased water yield, or in the form of nonmarket

benefits such as reduced sedimentation damage. Increased farm output is

evaluated like the benefits of irrigation. However, reduced sedimentation is

not sold in the market. Such benefits should not, in most cases, be evaluated

using I-O multipliers. This is not to say that there are no benefits. If the

analyst can estimate the forward linkages of increased water yield or reduced

sedimentation, he may be able then to identify and analyze the market effect,

if any.

32/ See the detailed example in Chapter V of an evaluation of a drainage

project.

78
Flood Damage Reduction

Costs. Installing flood damage reduction structures, in a sense, condenses

the annual costs of several years' flooding into the construction period.

Therefore/ one could argue that the flood damage reduction measured may change

the timing but not the magnitude of economic inpacts. Structure construction

costs likely impact primarily on the construction sector. Yearly clean up

costs should be deducted fron average annual costs prior to applying a multiplier.

Benefits. Benefits may occur as market or nonmarket production increases.

Sane market benefits may, of course, be the result of land use changes such as

more intensive agriculture.

Example. One might view a flood damage reduction situation for multiplier

analysis as follows. Average annual damages are $35,000—$20,000 to farmland

and $15,000 to streets, roads, bridges, and buildings. Structural measures to

prevent flood damage may cost $200,000 and take 2 years to install.

Multiplier analysis could proceed by first estimating the indirect effects of

structure costs during the 2-year construction period.

$200,000 ^ $100,000

2 years 1 year

$100,000 X 1.216 (construction final demand multiplier) = $121,600,

resulting in $21,600 of indirect impacts.

Since this example involves fairly short time lags, the costs and benefits are

not considered cxi a discounted average annual basis.

The indirect effects of the yearly clean up, which will be a decrease in economic activity after installâtiai of flood damage reduction structures, should

be estimated. -$15,000 x 1.215 (construction final demand multiplier) =

-$18,225, resulting in $3,225 of negative indirect inpacts. If the local

government unit which administered the project spent the money the next year on

other public works, the negative effect would be offset.

The $20,000 ye^i^ly damage to farmland is assumed to be in the form of decreased

crop production. Therefore, after the structures are installed, it becomes a

yearly $20,000 benefit plus its indirect effects. $20,000 x 1.073 (crop final

demand multiplier) = $21,460, resulting in indirect benefits of $1,460. Benefits and costs, in this case, may seem disproportionate, but one should keep in

mind that there is no attempt here to use discounted average annual figures nor

to estimate a benefit-cost ratio. Rather, the objective is to estimate indirect effects, viewing benefits and costs as they may actually occur over time.

This hypothetical project, evaluated over a 10 or 20-year evaluation period,

may yield a favorable benefit-cost ratio.

79
Outdoor Recreation

Costs. The costs of constructicxi of outdoor recreation facilities are usually

initiated in the constructioi sector. By observing the general cautions specified elsewhere in this report^ costs are usually easy to evaluate with multipliers.

Benefits. Outdoor recreation benefits in a large area such as a State or region

inay not be new infusions of eccnomic activity, but shifts fron an existing

activity to a new cne. In this case it is seldom justified to claim and evaluate benefits in the national economic developnent account. If the benefit is

new sales activity and expenditures, however, then the markup can be valued with

multipliers to estimate indirect impacts for the national econonic develc^xnent

accounts. In a small area such as a few rural counties/ an outdoor recreation

project may attract outsiders or attract local pecóle to the new facility. In

this case, benefits can be claimed in the regional development account.

Fish and Wildlife

Costs. Costs in the form of structures are evaluated as construction costs,

after making proper adjustments. Land use changes may involve positive or

negative production changes. The sales value of the land transfers is not

appropriate for multiplier analyses.

Benefits. Benefits felt in the market are appropriate for multiplier evaluation. Nonmarket benefits are not appropriate unless special multipliers have

been developed. Benefits may be in the form of increased conmercial fish catch

(market) or in the form of increased sport fish catch and hunter success (nonmarket). However, sport fishing and hunting equipnent purchases may be evaluated as service and sales values, like outdoor recreation.

Forestry

Costs. The forestry sector must be differentiated from the lumber and wood

products industry. Is it a forestry firm, a lumber and wood products firm, or

government agency which will incur forest management costs such as timber stand

thinning? The I-O model sector definitions and SIC manual, combined with the

analyst's judgment, can assist in proper initial sector identification.

Benefits. Benefits of forest practices are usually long run, and occur in

lunps. For example, reseeding a cutover area now could yield Christmas trees

in 10 years, pole timber in 30 years, and saw timber in 80 years, each of which

is in a separate SIC category. These lunps of benefits can be discounted back

to present average annual value and multiplied by appropriate sector multipliers or input into the prcper sectors of an I-O model.

Environmental Quality

Costs. Costs may be in the form of production losses or facility construction

80
costs. Production losses should be in the form of market products or services

to be appropriate for multiplier evaluation. Construction costs should be

evaluated as described in previous sections.

Benefits. Many environmental quality benefits may be of the nonmarket or

"difficult to value" type. Each case should be considered on its cwn merits,

in light of the cautions and limitations previously discussed.

Example; This exanple may demonstrate techniques in the areas of environmental

quality, water quality, and municipal and industrial water supply. Suppose a

council of governments in a drainage basin establishes the goal of improving

the quality of the water in its main river. This will be acconplished by

changing farming from cultivated crops to pasture on high sediment producing

farmlands, installing additional municipal sewage treatment facilities, and

designating the river banks as green belts. The physical effects of the project are, in addition to improving water quality, to change the composition of

farm output, improve the commercial and sport fish catch, increase outdoor recreation along the river, and reduce the need for muninicipal and industrial

treatment downstream.

The first step is to transform these physical effects into hypothetical economic effects amenable to multiplier evaluation. The derronstration is simplified by assuming that many of the problems discussed in preceeding sections

will not occur.

Changing conposition of farm output:

Decrease in rcw crop sales, $10,000 x 1.345 (crops final

demand multiplier) = $13,450, resulting in negative indirect

effects of $3,450.

Increase in livestock sales, $5,000 x 1.302 (livestock

final demand multiplier) = $6,510, resulting in indirect

inpacts of $1,510.

Improved fish catch:

Increased value of conmercial catch $1,500 = 1.571 (fishery

final demand multiplier) = $2,356, resulting in an indirect

impact of $856 increased value of sport catch. A shift

from stream and lake fishing to river fishing is assumed.

No substantial change in outdoor recreation expenditures

occurs.

Inproved outdoor recreation along the river:

Increases of river-related recreation are assumed offset

by decreases in other forms of recreation. Hence, there

is no measurable economic shift.

Reduced need for municipal and industrial water treatment

downstream :

81
This benefit could be viewed as an efficiency increase

in the water utilities sector. If the efficiency takes

the form of reduced costs and is passed on to consumers,

then the value of output of the utilities sector is decreased

which is offset by an increase in consumer income.

-$1,000 X 1.712 (water utilities final demand multiplier) =

-$1,712 (reduced total change in output), resulting in $712

of negative indirect inpacts.

+$1,000 X 1.750 (household sector FD multiplier) = $1,750

change in output, resulting in $750 of positive indirect

impacts.

If the water utility does not pass the efficiency on to

its consumers, but just decreases its use of some irput

such as chemicals, then the decrease can be analyzed

with the chemical sector multiplier.

-$500 X 1.129 (chemical final demand multiplier) =

-$564 reduced change in total output or $64 in negative

indirect effects.

Water multipliers or coefficients may be useful in environmental quality

analysis. Estimates of sectoral water use changes could be made once water

use is related to gross output levels.

Municipal and Industrial Water Supply

Costs. Costs will usually be one time installation costs initiated in the construction sector. Pumps, filters, pipes, etc., are usually evaluated with sane

manufacturing multiplier. Operation and maintenance costs continue over time.

Benefits. The benefits of municipal and industrial water supply could be in

the form of increased water quality or in the form of a more reliable supply

system. Depending on whether the output of public water utilities is market or

nonmarket, the benefit, if measurable, could be expressed as a change in gross

output of the water utilities sector or as a coefficient change to represent

an efficiency change. Multiplying an output change by the multiplier would

shew the input inpacts or backward linkages in support of the water utilities

sector. Response in output or greater efficiency (forward linkages) in water

using sectors would not be shewn under these circumstances. However, they

could be evaluated, if measurable, by increasing the outputs of major water

users. This may assume that water is the primary constraint on output, an

assunption which may be poorly founded in many cases.

Water Quality

Costs. Costs may be in the form of construction and maintenance for water

treatment facilities. It is usually fairly sim[f)le to estimate the indirect

effects on the econany. Previously mentioned warnings and adjustments should

be observed.

82
Benefits. The difficulties of ineasurement and evaluation pertaining to

municipal and industrial water benefits are applicable here, also. In addition, benefits nay occur in the fom of improved fish and wildlife or outdoor

recréâtiai opportunities. Such benefits should be evaluated as described

earlier.

Electric Power

Costs. Multiplier evaluation of costs is fairly straightforward. Costs can be

amortized over the construction period at the proper interest rate prior to

multiplier or I-O evaluation. However, the cost of hydroelectric or thermal

electric plants is often so large that existing interindustry relations upon

which a multiplier was originally determined are distorted. The existing

multiplier may therefore no longer be an effective representation of indirect

economic impacts. A multiplier fron same other similar region for a similar

electric power project could be used. The regional source of sophisticated

machinery is also an important consideration.

Benefits. Electric power benefit evaluation presents the same problems as does

municipal and industrial water supply benefit evaluation. Electric utility

production is valued in the national 1-0 model as the operating revenue or sum

of charges made by the utility to its customers. There is still the problem of

hew to evaluate the increased production once it has had a dollar value estimated. If it is considered to be an increase in output of the electric utilities

sector, then only the multiplier effects of increased inputs to the sector, or

backward linkages, will be estimated. The additional output, or forward linkages, it permits in other sectors as they respond to increased availability of

electricity would not shew, but could be evaluated if it were possible to estimate the output responses. It would not be valid to assume that all sectors

would increase output in response to additional electric power availability.

If the analyst has good evidence that some industry such as aluminum production

would markedly increase output in response to additional electric power, then

it would be acceptable to apply a multiplier to the aluminum sector to estimate

indirect econanic effects. Increased domestic welfare from electricity is

generally not amenable to multiplier analysis.

Navigation

Costs. Construction costs for navigation improvements are apt to be large and,

therefore, subject to limitations like those for electric power facilities.

Such projects can change the economic structure of the economy and the multiplier.

Benefits. Navigation benefits are likely to be in the form of reduced transportation costs, an efficiency increase. As such, they may be difficult to

evaluate with multipliers. It is inportant to keep in mind that an increase in

water borne commerce may be offset by a decrease in nonwater commerce. There

may be little or no gain, merely a change in transportation mode. In such a

case, the output of water borne transportation could be increased and evaluated

for indirect effects, and that of truck and rail transportation decreased and

the indirect effects estimated.

83
other Applications of Multipliers an(3 Coefficients

It is useful, in seme cases, to develop sectoral coefficients reflecting the

relationship between sectoral gross outputs and can input or resource such as

water, capital, land, labor, energy, or pollution, which are usually not

directly measured in an I-O model. Energy and pcDllution coefficients could

have special significance in the environmental quality account of Principles

and Standards accounting. These coefficients 33/ (sometimes called resource

coefficients) are expressed in terms such as acre-feet of water per millic»i

dollars of gross output, as enployees per million dollars of output, or as

energy equivalents per millicai dollars of output«

A further extension of 1-0 model and 1-0 multipliers could be in the form of

simulation and linking with other econanic and physical models. For example,

a river basin can be simulated with linked models representing climate, stream

flew, withdrawals, return flews, cptimum water usse patterns and levels, crop

outputs, crcp values, and multiplier derived economic inpacts. The output of

efficiency models such as linear programming can be input to 1-0 models, or

analyzed with multipliers.

Econemic analysis, no matter hew carefully done, is only one input into the

natural resource and regional decisionmakmg proc:ess. There are also legal,

engineering, political, and ecological factors to consider. After economic impacts have been estimated, they, along with other factors, must still be evaluated as to whether or not they meet the overall c±)jectives of planning. The

shortcomings of economic evaluation must be kept in mind. Eccnomic models are

simulations, not duplicates of the real world, líierefore, model inpacts may

differ frem real world impacts. For example, 1-0 and multiplier techniques

assume a linear and unlimited supply of inputs to production without substitution. This is not the case in the real world. Does a region actually have the

development potential and the resource inputs a linear 1-0 model assumes?

Furthennore, 1-0 model impacts do not deal with the question of changing concentration or diversification of industry, which may be a regional developnent

ccncern.

33/ See the brief discussion of resource coefficients in Chapter V.

84
CHAPTER VII. COvICLUSIONS AND RECOMMENDATIOSiS

by Robert McKusidk and Linda Zygadlo

Conclusions

Regional Developnent

(1) Regional development should be included as an optional planning objective

in the WRC Principles and Standards along with national economic develcpment

and environmental quality. WRC and the Office of Management and Budget should

recognize and make provisions for the fact that most States^ regions and

counties are interested in local socioeconomic evaluation and impacts.

(2) If regional development is included as a planning objective, impacts of

alternative regional development plans on national economic development efficiency should be displayed so that local people and regional decisionmakers

can corpare costs, benefits, and other regional and environmental tradeoffs

involved in selecting and implementing a plan enphasizing regional development.

(3) Regional studies should recognize the distinction between grcwth and

development. Development is much broader than the economic characteristics

of growth. Regional preferences, goals, and plans have to be determined and

evaluated with respect to growth; development; existing resource base and

industry mix; overall economic base; current and potential production of

goods and services; detiand for regional output; internal economic structural

changes; sector expansion; regional boundaries; direct and secondary econonic

iirpacts on employment, income, and output; and intraregional and interregional

commodity and factor distribution.

Principles and Standards

(4) The Principles and Standards and the USDA Guidelines should include more

precise descriptions of externalities. Whether an inpact is considered internal

or external depends on the problem definition and study area boundaries. Measurable externalities can be expressed in both monetary and nonmonetary values;

however, some externalities are not measurable. Terms such as secondary output

effects, indirect enplcyment effects, and other more precise terms should be

used in appropriate context. Categorizing these iirpacts under the vague term

externalities leads to confusion and inconsistency in application.

(5) There is a need to develop applied examples for secondary effects which

should lead to a more consistent application of the Principles and Standards.

The application of I-O methods to develop applied exairples was a major purpose

85
of this study. This report should be used in conjunction with the WRC

Guideline 5 Regional Multiplier approach to give direction and caution in the

use of multipliers.

(6) Information included in the regional develoiannent account should not be

limited to a regional account duplicating the tyjpe of information in national

économie development account. While the national econonic development account

focuses entirely on the national economic iirpactis of plans, the regional develc^xnent account has a much broader base of information, ranging fron economic

to demographic and environmental inpacts.

I-O Analysis

(7) Since 1-0 is an inportant analytical approach used to determine regional

developnnent impacts and the BEA multipliers (^) are recommended by the WRC to

be used nationwide, a special effort to educate practitioners in the application and use of 1-0 and multipliers should be made. The possibility for misapplication of 1-0 techniques is great.

(8) 1-0 models have advantages over the use of multipliers for detailed project and program evaluation and plan formulation. They enhance a researcher's

analytical capacity, particularly the ability to develop and evaluate regional

development strategies. Also, the techniques for estimating 1-0 tables for

small areas at a reasonable cost are very promising.

(9) Extrañe care should be used in applying 1-0 multipliers in isolation from

the models from which they were derived. In particular, interregional flews

(inport-export balances) and other leakages out of the region can bias the

multiplier afproach. Assumptions and limitationiES of both approaches (table

vs. multipliers) have to be considered before in^^acts can be properly estimated

and interpreted. Tests should be conducted to ccxrpare broad geographical or

sectoral multipliers to more specific regional multipliers.

Regional Development, Principles and Standards, ¿ind 1-0 Analysis

(10) Conventional 1-0 techniques can be used to study regional development

aspects of resource plans. However, meaningful ¿ipplication depends on: (a)

reliable estimates of structural relationships arx^ng sectors of an economy,

and (b) a careful study of direct project and program effects and conversion

of these effects into final demand change on an industry-by-industry basis.

(11) 1-0 is not a cure-all for planners' problems with respect to regional

development and secondary econonic effects. Other studies and variables are

required to handle the developn^ent aspects of a plan. 1-0 results relate to

growth (i.e., regional economic movements in such aggregates as gross sales,

household income, or employment).

86
Program and Project Evaluation

(12) A familiarity with regional comn[Kx3ity flows and economic theory is

necessary in multiplier and I-O application to minimize misuse of the technique.

(13) Prior to multiplier or 1-0 analysis, appropriate adjustments must be made

to benefit-cost estimates.

(14) All output changes must be reduced to final demand levels prior to I-O or

multiplier analysis.

(15) Multiplier analysis provides only aggregate effects, whereas the use of

an I-O model identifies sectoral changes.

Recomaniendations for Future Research

(1) There is a need to determine hew the impacts of plans developed using

alternative objectives of national economic development, environmental quality

and regional development would differ. Presently, the range of impacts on

regional resource allocation and problem solution under these different objectives is unknown. Questions need to be answered concerning hew the three types

of plans might vary in a region with a highly concentrated economic base, a

region of high export leakages, or in a region v^ere industries are reduced or

roTKDved, and hew alternative plans might result in different trade patterns.

(2) There is a need to strengthen and/or estimate some of the limiting assumptions and data weaknesses underlying I-O models:

(a) The relationship between the stability of regional models

and the relative volume of imports and exports needs to be

examined.

(b) Additional research is needed to lessen the disaggregation

problems which prevent a higher degree of industry detail.

(c) Methods to relate final demand estimates to natural resource

development, conservation, and management need to be improved.

(d) Methods to estimate more reliable technical coefficients at the

regional level need to be developed.

(e) Conflicts between researchers concerning the elements included

in the household income rcw and column need to be resolved.

(3) I-O models should continue to be expanded into other areas such as energy,

capital, and pollution. Better estimates are needed of these coefficients

associated with changes in current levels of industry output. This would involve close cooperation with physical and biological scientists. Of major

importance are the effects on an econoiry when a new sector is added or an

existing sector is changed or deleted due to such things as an energy crisis

and pollution abatement control.

87
(4) Work shcxald continue to inprove: (a) nonsurvey techniques to develop

small area models frcm national and regional models^ and (b) national interregicxial models to link existing regional models to account for export/inport

flews and leakages out of small areas. Also, additional model extensions

need to consider (a) the implication of discounting and other techniques to

allow for the passage of time, (b) aggregation and size of region as related

to multiplier stability, (c) su^ly and/or demand constrained models, and (d)

distributional aspects of regional plans and the implications for cost sharing.

88
BIBLIOGRAPHY

Alexander, John VI. The Economic Life of Oshkosh, Part I. Madison:

Univ. Wise, 1952.

Barkley, Paul W. "The Economic Analysis of Small Areas: Intellectual

Poverty Within Intellectual Plenty." In: Camiunity and Human Resource

Development in the West. I^t No. 1. San Francisco: Western Agricultural Economics Research Council, 1971.

Baumöl, W. J. Welfare Econonics and the Theory of the State. 2nd ed.

Cambridge: Harvard Univ. Press, lybb.

Bell, John F. A History of Economic Thought. New York: Ronald Press,

1953.

Chiou-Shuang Yan. Introduction to Input-Output Econoiïiics. New York:

Holt, Rinehart, and Winston, Inc., 1969.

Ciriacy-Wantrop, S. V. "Benefit-Costs Analysis and Public Resource

Development." ^: Smith and Castle (eds.), Econonics and Public Policy

in Water Resource Developnent. Ames: Icwa State Univ. Press, 1964.

Clark, Richard T., Robert B. Fletcher and Harley J. McKinney. The Star

Valley Econany - An Interindustry Analysis. RJ85. Univ. Wyoming, Nov.

1974.

Detroit City Plan Commission. Economic Base of Detroit. Detroit: 1944.

Dorfman, Robert, Paul A. Samuelson and Robert M. Solon. Linear

Programming and Economic Analysis. New York: McGraw-Hill, 1958.

Edwards, Clark, Robert Coltrane and Stan Daberkcw. Regional Variations

in Econanic Growth and Developnent—With BRiphasis on Rural Areas. AERS

2Ü5, U.S. Department ot Agriculture, Economic Research Service. May 1971.

Federal Register. Water Resources Council, Water and Related Land

Resources, Establishment of Principles and Standards for Planning. Wash.,

D.C.: Sept. 10, 1973.

Fisher, Joseph L. "Concepts in Regional Economic Development Programs."

Regional Sciences Association Papers and Proceedings, 1955.

Fox, Karl A. "The Major Problem of Rural Society." Paper presented at

the Third Annual Fann Policy Review Conference, Ames: Iowa, Dec. 18,

1962.

Gittinger, J. P. Economic Analysis of Agricultural Projects. Baltimore:

Johns Hopkins Univ. Press., 1972.

Glasson, John. An Introduction to Regional Planning: Concepts, Theory,

and Practice. London: Hutchinson Educational Ltd., 1974.

89
(16) Grubby Herbert W. The Structure of the Texas Econony, Austin: Office

of the Governor, March 1973.

(17) Haveman, R. H. "Evaluating Public Expenditures Under Conditions of

Unenplqyment." In: Haveman and Margolis (eds.)f Public Expenditures

and Policy Analysis. Chicago: Markham Publishing Co., 1970.

(18) Haveinan, R. H. and J. V. Krutilla. Unenployment, Idle Capacity, and

the Evaluation of Public Expenditures^ Bi].tiniore: Johns Hopkins Univ.

Press, 1968.

(19) Hirsch, Werner Z. "Interindustry Relation of a Metropolitan Area."

Review of Econanics and Statistics. XLI (Nov. 1959).

(20) Holmes, B. H. A History of Federal Water Resources Programs, 1800-1960.

MP-1233, Econ. Res. Serv., U.S. Dept. Agr., 1972.

(21) Homer Hqyt Associates. Economics Survey of the Land Uses of Arlington

County, Virginia. Sept. 1951.

(22) Hoover, Edgar M. The Location of Economic Activity. New York,

McGraw-Hill, 1948.

(23) Hoover, Edgar M. "Sane Old and New Issues in Regional Develqpment." In;

Regional Economic Developnnent in the United States, U.S. Dept. Canmerce,

Econ. Dev. Adm. Oct. 1967.

(24) Isard, Walter. Methods of Regional Analysis; An Introduction to Regional

Science, Cambridge, Mass.; MIT Press, 1960"^

(25) Jansma, J. D. "Measuring the Inpact of Natural Resource Investments on

Employment, Income, and Economic Structure." Southern Cocperative

Series, Bulletin 212, University of Florida, Gainesville, Florida, Oct.

1976.

(26) Kalter, R. R., et al. "Criteria for Federal Evaluation of Resource

Investments." Ithaca; Cornell Univ. Aug. 1969.

(27) Keynes, John Maynard. The General Theory of Bfiployment, Interest and

Money. New York; Harcourt, Brace and World, Inc., 1964.

(28) Knetsch, J. L., et al. "Federal Natural Resources Development; Basic

Issues in Benefit and Cost Measurement." V7ash., D.C.; Natural Resources

Policy Center, George Washington Univ., Mciy 1969.

(29) Landgren, N. E. "Principles and Standards for Planning Water and Related

Land Resources; Likely Inpacts on Future Di^velopments." Paper presented

at the Great Plains Resource Economics Committee Seminar on Conflicts and

Issues in Water Quality and Use, Denver; /^r. 7-8, 1976.

(30) Leontief, Wassily. "Quantitative Input-Output Relations in the Economic

Systen of the United States." Review of Economics and Statistics. XVIII,

(Aug. 1936).

90
(31) Leverif Charles L., John B. Legier^ and Perry Shapiro. An Analytical

Framework for Regional Development Policy. Cambridge^ Mass.: MIT Press.

1970.

(32) Leven, Charles L. "The Economic Base and Regional Growth." In;

Research and Education for Regional and Area Developnent. Ames: Iowa

State Univ. Press, 1966.

(33) Leven, Charles L. "Establishing Goals for Regional Economic Developnent."

In; R. P. Misra (ed.). Regional Planning Concepts, Techniques, Policies,

and Case Studies. Prasaranga, India; Univ. Mysore, 1969.

(34) Leven, Charles L. "Theories of Regional Growth." In; Problems of

Chronically Depressed Rural Areas. North Carolina Policy Series,

Raleigh; N. Carolina Univ., 1965.

(35) Miemyk, William H. The Elements of Input-Output Analysis. New York;

Random House, 1967.

(36) Mishan, E. J. Cost-Benefit Analysis; An Introduction. New York; Praeger,

1971.

(37) Misra, R. P. "On the Concept of Regional and Regional Planning." In;

R. P. Misra (ed.). Regional Planning Concepts, Techniques, Policies, and

Case Studies. Prasaranga, India; Univ. Mysore, 1969.

(38) Moore, Frederick T. and James W. Peterson. "Regional Analysis; An

Interindustry Model for the State of Utah." Review of Economics and

Statistics. XXXVII (Nov. 1955).

(39) North, Douglas C. "Exports and Regional Econonic Growth; Reply." In;

Regional Developr^nt and Planning. John Friedman and William Alonso,

(eds.), Cambridge, Mass.; MIT Press, 1964.

(40) North, Douglas C. "Location Theory and Regional Economic Grovth." In;

Regional Development and Planning. John Friedman and William Alonso,

(eds.), Cambridge, Mass.; MIT Press, 1964.

(41) Palmer, Charles and Ross Layton. "A User's Guide for Regional InputOutput Analysis." (Urpublished paper prepared for Econ. Res. Serv.,

U.S. Dept. of Agr., East Lansing, Mich.), 1973.

(42) Perloff, Harvey S., Edgar S. Dunn, Jr., Eric E. Lanpard and

Richard F. Muth. Regions, Resources, and Econonic Growth. Lincoln;

Univ. Neb. Press. 1960.

(43) Pfouts, Ralph W., (ed.). The Techniques of Urban Economic Analysis.

Trenton, N.J.; Chander-Davis, 1960.

(44) Prest, A. R. and R. Turvey. "Cost-Benefit Analysis; A Survey." In;

American Economic Association and Royal Economic Society, Surveys of

Economic Theory; III. New York; St. Martin's Press, 1966. pp. 155-207.

91
(45) Richardson, Harry W. Input-Output and Regional Ecx)nomics> Trovbridge,

Great Britain: Redwood Press Liinited, 1972.

(46) Schaffer, William A. and Kong Chu. "Non Survey Techniques for Constructing Regional Inter-Industry Models." Papers of the Regional Science

Association, XXIII, 1969. pp. 89-92.

(47) Stipe, Sterling H., Jr. " A Proposal and Evaluation of a Regional InputOutput Modeling System." Unpublished Ph. D. dissertation, Mich. State

Univ., 1975.

(48) Tiebout, Charles M. The Conmunity Economic Base Study. Supplementary

Paper 16. New York: Committee for Economic Development, 1962.

(49) Tiebout, Charles M. "Exports and Regional Economic Growth." In:

Regional Develc^^nent and Planning. John Friedman and William Alonso,

(eds.), Cambridge, Mass.: MIT Press, 1964.

(50) United Nations. Problems of Input-Output Tables and Analysis. New York:

1966.

(51) U.S. D^artment of Agriculture, Economic Research Service. Rural People

in the American Economy. AER-191, 1966.

(52) U.S. Department of Agriculture, Econcanic Research Service. Secondary

Iitpacts of Public Investment in Natural Resources. MP-1177, Aug. 1970.

(53) U.S. Department of Agriculture. USDA Procedures for Planning Water and

Related Land Resources. March 197T^i

(54) U.S. Department of Commerce, Bureau of Econonic Analysis. IndustrySpecific Gross Output Multipliers for BEA Economic Areas. Dec. 1976.

(55) U.S. Department of Labor, Bureau of Labor Statistics. General Explanations of the 200 Sector Tables: The 1947 Interindustry Relations Study.

BLS I^t. 33. June 1953.

(56) Vlachos, Evan, et al. Social Impact Assessment: An Overview. A Report

submitted to the U.S. Army Engineer Institute for Water Resources, Dec.

1975.

(57) Water Resources Council. Section 80 Study. Wash., D.C.: Nov. 1975.

(58) Water Resources Council. Principles for Planning Water and Land

Resources. Wash., D.C.: 1970.

(59) Water Resources Council. Standards for Planning Water and Land

Resources. Wash., D.C: 1970.

(60) Water Resources Council. Guideline 5 Regional Multipliers. Wash., D.C:

Jan. 1977.

92
APPENDIX A: GLOSSARY OF TERMS

by Clifford Jones, and Sterling Stipe

I-O Definitions

When working with a particular 1-0 model it is important to become familiar

with the cxDnventions and definitions of that model. For example, the 1-0

model developed by BEA entitled. The Input-Output Structures of the United

States Economy for the years 1947, 1958, 1963, and 1967 has an excellent set

of descriptive materials describing the models developed by BEA over the past

30 years. This material is useful to the analyst who uses the above models.

Since the BEA models serve as basic data sources for many other I-O models,

especially State and regional models, one should becane familiar with their

characteristics. A good starting point for this is to review: Definitions

and Conventions of the 1963 Input-Output Tables, Office of Business Economics,

U.S. Department of Ccxnmerce, November 1970.

Aggregation. Combining business finns or economic activities of an econary

into I-O sectors (or combining sectors within an I-O model, thereby reducing

the number of sectors or size of the model).

Direct coefficients. See technical coefficients.

Direct employment change. The change in eirployment of a sector in response to

a change in final demand for its output (the direct employment coefficient

times a change in final demand).

Direct employment coefficient. Total eirployment of a sector divided by its

total output.

Direct income change. The change in income payments to households in response

to a change in final demand (the direct income coefficient times a change in

final demand).

Direct income coefficient. Total income payments by a sector divided by its

total output.

Direct plus indirect coefficients. Used interchangeably with total requirements and inverse coefficients. Each coefficient in a direct plus indirect

coefficients matrix denotes the total output its sector must produce in

response to a $1 change in final demand of a given sector. This matrix may

also be identified as the (I-A)"-^, the inverse, the Leontief inverse, or the

total requirements matrix. In an I-O model (if not transposed), the direct

plus indirect requirements matrix, or the total requirements matrix, shows the

total output required by the economy (all other sectors) from the row sector

per dollar of delivery to final demand by the column sector.

Direct requirements. Used interchangeably with technical coefficients.

93
Disaggregation. Dividing sectors of an econory (or an existing I-O model) into

smaller or more detailed groups, thereby increasing the number of sectors or

size of the 1-0 model.

Employment multiplier» An estimate of the total employment generated in the

econcary per a one unit change in ennployment in a particular sector of the

model. Type I accounts for caily direct and indirect effects and the Type II

enplqyment multiplier includes the induced effects. See incane multiplier

for a description of Type I and Type II multipliers.

Endogenous variables. Ihose elements in an I-O model whose value is determined

by the model, the dependent variables. The processing sector.

Exogenous variables. Those elements in an I-O model whose value must be

specified independently, the final demand and payments sectors.

Exports. Goods and services produced within the area being modeled and sold to

consumers outside the area. Exports are always considered part of final demand

even if the goods exported are used in the processing sector of the nev region.

Final demand. Ihat part of an I-O model transactions table containing sectors

which represent final or terminal consumers (in contrast to intermediate demand) of the output produced by the local econony or modeled econoiry. Purchasers of the processing sectors' output.

Final demand is the exogenous sector which determines the level of output of

the I-O model's econoiry since changes in final demand are transmitted throughout the rest of the transactions tables. Final demand includes: personal consumption expendituresf gross private capital formation, inventory accumulation,

and exports. Generally, government purchases are also included in final demand,

however, saœ regional models include local government expenditures as part of

the processing sector. In I-O models closed with respect to households, personal consumption expenditures by housdiolds within the economic area of the

model are not part of the final demand.

Sales to final demand represent final sales by processing sectors in that this

output does not reenter the production process of the model econony. Changes

in sales to final demand are multiplied by I-O sector multipliers and coefficients to estimate changes in the model econony's level of output, errployment,

and income.

Final demand multipliers. The sum of the column entries in the direct plus indirect coefficients matrix, or total requirements matrix, of an I-O model. The

sum for each column is that column sector's final demand multiplier. It denotes

the value of total output that all sectors of the econoiry must collectively

produce per dollar of output sold to final demand by the column sector. Final

demand multipliers are also frequently referred to as gross output or output

multipliers. The final demand multipliers discussed in this report coincide

with the total gross output multipliers used by BEA.

Final output. See final demand.

94
Flow table. See transactions table.

Gross output multipliers (also output or total gross output multiplier). Used

to describe two very different types of I-O multipliers. It is frequently used

to describe what this report identifies as a final demand multiplier^ a multiplier multiplied by final demand to determine a nav level of gross output.

(I-A)"-*" matrix. See direct plus indirect coefficients.

Imports. Goods and services obtained from outside the area of the I-O model.

Th^ may be intermediate inputs of the processing sectors or direct purchases

by final demand sectors^ or imported value added inputs.

Incane multiplier. Shews the amount of inccxne generated in the econoity per

dollar of change in incote paytnents of a given sector. There are two kinds:

Type I and Type II.

The Type I income multiplier estimates the direct and indirect change in household income in the economy of the model per dollar change in direct income payments to households. This multiplier is also called the sinple income multiplier. The Type I multiplier is corputed from an I-O model with households

exogenous.

The Type II income multiplier estimates the direct, indirect, and induced

change in household inccxne per dollar change in the direct income payments to

households. It takes into account the induced effect of consumer spending on

household income, in addition to the direct and indirect effects of changes in

output on household incane. Computed from an 1-0 model with households endogenous.

Indirect requirements. Input requirements initiated in the second and succeeding rounds of purchases among the endogenous sectors. Total requirements minus

direct requirements. Ihey are obtained by inverting the matrix of technical or

direct coefficients to get the direct plus indirect coefficients matrix and

then subtracting from this the technical coefficients matrix to get the indirect

requirements matrix.

Induced effects. Changes in output and household income resulting from change

in household expenditures in response to direct, indirect, and induced changes

in output. Induced effects are estimated by moving the household row and

column into the processing sector of the 1-0 model.

Industry. See sector.

1-0 Model. A depiction of the supply and demand relationships of an economy

in equilibrium. It does not assume full employment of resources. It describes

the transactions occurring in an econcany for a given time period, normally a

year. An 1-0 model can be designed for a metropolitan, a multicounty. State,

or multistate economic area as well as a Nation.

95
Input requirements. See technical coefficients.

Interindustry transactions» The total value of purchases or sales by an I-O

sector from or to another sector during the time period of the model.

Intermediate inputs. Those irputs which the model econony processing sectors

purchase from each other, plus some imports of goods and services.

Intermediate output. Output sold to other processing sectors in the model

econonoy to produce other goods and services.

Inverse coefficients. See direct plus indirect coefficients.

Leontief inverse. See direct plus indirect coefficients.

Output multipliers. See gross output multipliers and final demand multipliers.

Payments sector. Includes the purchases of primary and exogenous inputs by

the processing sectors. It includes value added and inports.

Primary inputs. Primary inputs are different from intermediate inputs in that

they are purchased directly from the primary supplier by the using industry.

They cannot be produced by the processing sectors and must be supplied from

outside the 1-0 model. Primary irputs are land, labor, and capital. Some

primary inputs may be inported.

Processing sector. Ihe first quadrant of the transactions table. It includes

all sectors in an econony producing goods and services for final demand. These

are the endogenous sectors of the model. All output of the processing sectors

is either sold to final demand or to other processing sectors (to each other).

Sector. An aggregation of business enterprises, firms, establishments, or

activities which produce the same or similar products, or which purchase the

same inputs to use in production. Sectors are often defined by using the

Standard Industrial Codes in classifying business activities into sectors.

The terms sectors and industry are sometimes used interchangeably in 1-0 terminology. Each term, broadly defined, merely means the primary producing

(selling) or purchasing (buying) unit in an 1-0 model. Often an 1-0 model

coTibines several industries into one sector, as in highly aggregated models.

1-0 analysts tend to refer to the individual aggregates of firms, establishments, or economic activities in an 1-0 table as industries and to a broad

collection of activities or to one of the four quadrants of the 1-0 table as

a sector. Miernyk has commented on industries and sectors.

A transactions table consists of a collection of industries

and sectors, and it might be helpful to distinguish between

these concepts. According to Tiebout, 'industries refer to

aggregates of firms producing similar products. Sectors refer

to the kinds of markets that industries serve.' This is a useful distinction to ke^ in mind. When discussing the transactions table, however, we have at times referred to one

96
collection of activities as the processing sector, and we have

spoken of the individual activities outside this category as

the final denend sector when they are considered collectively.

Thus the term sector may be used at tiines with slightly different

rneaningsr but the meaning which applies in each case should be clear

from the context of the discussion. (35)

Miernyk, himself, appears to use the terms industry and sector interchangeably

(35, pp. 8, 49, 50, and 78). In this report, industry and sector are used interchangeably, except when referring to the four quadrants of the I-O table;

these are referred to as sectors.

Sectoring. Defining the industries or sectors of an 1-0 model.

Technical coefficients. The dollar value of inputs required by purchasing industry fron a selling industry in order for the purchasing industry to produce

a dollar's worth of output. Technical coefficients are conputed by dividing

each industry's purchases (column entries in an 1-0 model) by its total gross

output. They are only conputed for the processing sector. Technical coefficients are also referred to as direct requirements, direct coefficients, or

input requirements.

Total change in enployment. The direct employment change times the employment

multiplier. Also, may be estimated by multiplying the total employment effects

coefficient times the change in final demand.

Total change in incane. The direct income change times the income multiplier.

Also, may be estimated by siirply multiplying the total incone effects coefficient of a sector times that sector's change in final demand.

Total change in output. The product of a final demand multiplier times a

change in final demand.

Total change in resource requirements. The direct plus indirect coefficients

matrix times vectors of resource coefficients (direct requirements per unit of

output by sector) times changes in final demand.

Total employment effects coefficient. Shews the total change in employment in

the econony per unit change m final demand of a given sector. Coirputed by

multiplying the direct plus indirect coefficients matrix times a row of direct

employment coefficients.

Total gross outlay. The total value of an 1-0 sector's inputs (or its total

purchases). It includes inventory depletions.

Total gross output. The total value of an 1-0 sector's output (or its total

sales). Includes additions to inventories. It is the total of intermediate

plus final goods. It is not the same as GNP, since GNP includes only final

sales.

Total gross output multipliers. See gross output multipliers and final demand

multipliers.

97
Total income effects coefficient. Shews the total change in income in the

econorr^ per unit change in final demand. The coefficients are computed for

each sector in an I-O model as the sum of the products obtained by multiplying

that sector's column of direct plus indirect coefficients times the rcM of

direct income coefficients of the I-O model. (Ihe direct plus indirect coefficients matrix times a rcM vector of income coefficients). In models with

households endogenous^ it is a household rov entry of the direct plus indirect

coefficients matrix.

Total requirements matrix. See direct plus indirect coefficients matrix.

Transactions table. A table of purchases and sales by industries used to describe the interindustry transactions of an econory. Ihe transactions table,

containing the basic information of the I-O model, shews who produces what and

to v^cm they sell.

Transposed I-O matrix. A matrix in which column elements have been converted

to rew elements.

Type I multiplier. A final demand nultiplier (or gross output multiplier) in

v^ich local household consunption expenditures (direct sales to local households) is defined as being exogenous to the model. Accordingly, these multiplier effects can be measured in terms of gross output, household income,

and/or employment.

Type II multiplier. Defines local household consunption expenditures as being

endogenous to the model. Local households are treated as another industry in

the model. Households sell labor, rent property, provide financing, and perform services for which they receive wages, salaries, interest, and dividends.

Their purchases of locally produced goods and services are considered to be

parallel with those emanating fron other local industrial sectors. This procedure allows one to take into account the induced effects of new rounds of

local household consunption expenditures on the local econony. Accordingly,

these multiplier effects can be measured in terms of gross output, household

income, and/or enplcyment.

Value added. The difference between the value of inputs purchased and the

value of outputs sold. Value added includes wages and salaries, pensions,

royalties, annuity payments, business taxes, depreciation, insurance claim

payments, dividends, interest, rent, and profit or loss. Value added includes

personal income of households before taxes.

Value added also includes retained earnings of businesses. Also included are

corporation earnings which are paid in the form of stock dividends and conpensation to enplcyees in the form of stock. Transfer payments such as social

security and veteran's payments appear in the value added row of an I-O model

as payments by government to households, as do government payments to its

civilian ernployees and military personnel.

98
Definitions of Terms Used in Plan Formulation

Backward linkages. See induced effects.

Direct effects. The first wave of project induced inpacts or reactions

(beneficial and adverse) accruing to those persons or features of our environment that are the first recipients of project action. Direct impacts may be

measured and evaluated in either physical or monetary units. Direct inpacts

are often called primary effects.

Efficiency gains. Producing more output with the same or less input, or producing the same output with less irput. Efficiency gains also occur when output is provided to consumers at lower costs per unit.

External economies. Externalities resulting in benefits.

External diseconomies. Externalities resulting in harmful consequences, as

opposed to benefits.

Externalities. 34/ An externality exists v^en the social costs and benefits of

the actions of an individual, enterprise, or institution diverge from the

private costs and benefits to that actor. Also frequently referred to as spillovers. The fundamental basis of the concept of an externality is interdependence and the absence of compensation. Those receiving the benefits, whether

monetary or nonmonetary, do not pay for them. Those causing others in society

to have higher costs do not pay anything to offset these higher costs. Externalities are generally broken into two categories: technological and pecuniary.

Indirect effects. Those repercussions that occur throughout the economy or environment m reaction to direct or primary project effects. For exanple, the

value of changes in output of all businesses that serve the cotton producers of

an area as they supply cotton producers more goods and services in response to

an increase in cotton production caused by cotton producers taking advantage of

the beneficical effects (direct effects) of a project. Indirect effects are

frequently called secondary inpacts.

Induced effects. Secondary market effects which result from change in the output of industries which supply inputs to the primary or direct impact activities and to the inplementation of the plan itself. These are the so-called

backward linkages induced by the plan.

Plan. The action to be undertaken in a specific area for the control, development, and use of water and related land resources. It may involve institutional changes or structural changes.

Primary effects. See direct effects.

34/ The USDA"Procedures for Planning Water and Related Land Resources improperly uses secondary inpacts and externalities interchangeably.

99
APPENDIX B: NŒSURVEY ESTIMATION TECHNIQUES FDR SUBSTATE

REGIONAL INTERINDUSTRY MODELS

by Robert Niehaus

Several researchers in the Natural Resource Economics Division, Economics,

Statistics, and Cooperatives Service (ESCS), U.S. Department of Agriculture,

are estimating I-O models of substate regional economies. These efforts have

focused on multicounty areas in Arkansas, Louisiana, New York, Ohio, and

Oregon. One important result of this research has been the implementation of

viable nonsurvey techniques for estimating small area interindustry models.

A sumonnary of the procedures used in this research in this area should be helpful to readers of this report. This ^pendix concentrates on the most iirportant points in the estimation methodology and the principal types of data

required. 35/

An Overview of the Estimation Process

The flew chart (fig. 2) illustrates the primary steps involved in estimation.

The researcher begins with a base mcx3el. This may be either a model for the

State in which the study area is located, or it may be a disaggregated national

1-0 model of the United States. Current ESCS efforts have used both State

models and the 390-sector and 480-sector U.S. models for 1967.

The small area model is estimated fron the base model, following the principal

steps outlined in figure 2. Estimation relies upon data on regional population,

employment, income, production, and trade from a broad spectrum of published

data sources. Any primary data that the researcher can collect at lew cost is

also used in this estimation, but the principal data sources are secondary

ones. A partial list of these data sources appears in figure 2. Following is

a discussion of each of the four principal steps.

35/ For a more detailed discussion of these estimation techniques, see: "An

Assessment of Input-Output for Use in Project Impact Analysis and Identifying

Critical Relationships in RC&D and Small Watershed Planning Areas," an unpublished ERS report by Clifford Jones; "A Proposal and Evaluation of a Regional

Input-Output Modeling System," an unpublished Ph.D. dissertation, Michigan

State University, 1975 by Sterling Stipe;; "A Non-Survey Technique for Regional

1-0 Models: Application to River Basin Planning," by Richard N. Boisvert and

Nelson L. Bills in A.E. Res. 76-19, Department of Agricultural Economics,

Cornell University, August 1976; and "Forest Resource Management Analysis, An

Analytical System for Investigating the Local Economic Impact of Forest Service

Programs and Investments, Phase I Reports," by Ronald Drake, Stanley Randall,

and John Wilkins, Economic Research Service, July 31, 1971.

100
Figure 2. Small area model estimation process

Determination

of sectoring plan

Sources: 2, 4, 6, and 7

Estimation of industrial

total gross output

Sources: 1, 2, 3, 4, 5, 7, 10, and 11

Adjustments to

national average costs

Sources: 2, 4, 5, 6, 7, 8, and 10

Estimation of final demand

and value added sectors

Sources: 1, 3, 9, and 11

model of

small area

economy

Sources

1. U.S.

2. U.S.

3. U.S.

4. U.S.

5. U.S.

6. U.S.

7. U.S.

8. U.S.

9. U.S.

10. Dun

11. U.S.

Census of Population and Housing

Census of Agriculture

Census of Governments

Census of Manufactures

Census of Wholesale and Retail Trade and Services

Dept. of Commerce, County Business Patterns

Dept. of Agriculture, Agricultural Statistics

Dept. of Interior, The Minerals Yearbook

Dept. of Agriculture, Economics, Statistics, and Cooperatives Service, Farm Income:

State Estimates

Dun and Bradstreet, unpublished county data files

Dept. of Labor, Bureau of Labor Statistics, Employment and Earnings

101
(1) Détermination of Sectoring Plan

Since the base model currently in use contains detail on as many as 480

different industries^ some elimination and aggregation is essential to arrive

at a model of workable dimensions. Many of these sectors can be eliminated

from the analysis easily. Cotton, for example^ is not produced in New York and

can be readily eliminated in an analysis of that area. Other sectors will no

doubt need to be aggregated. Ihe objective in doing so is to reduce the number

of sectors as much as possible without losing necessary accuracy in the key

impact industries. County Business Patterns, the Census of Agriculture, and

the Census of Manufactures are good sources to determine vy^ich industries are

located within the region. Ihe Standard Industrial Classification Manual is

the basic reference concerning how similar industries should be aggregated.

(2) Estimation of Industrial Total Gross Output

The second stage in the estimation process is the calculation of total gross

output in each industry. Much of this data is available frann the sources

listed above, as well as in other references listed in figure 2. Frequently,

however, it is necessary to arrive at estimates of gross output which are not

readily available from published sources. In particular, differences in industrial sector definition in the base year for which the model is being estimated and in the geographical delineation of the model make it impossible to

rely sinply en published gross output data.

When this is the case, the ESCS approach is to interpolate the necessary gross

output data on the basis of the assumption of a stable relationship between

output and employment in the region, industry, and time period under study.

For exanple, estimation of the total gross output of the food processing sector

of the lower Hudson River Valley of New York in 1967 might be based upon total

regional employment in the sector in that year and the national or State output

per worker ratio in food processing for 1967. Sources of data may vary depending upon the industry, region, or year, but the basic output-eirploynent

approach to interpolation of the required data is the dominant technique used

in ESCS, as well as throughout the profession.

(3) Adjustments to Base Model Coefficients

The third, and perhaps most difficult, stage in estimation is making the necessary adjustments to the base model interindustry technical coefficients. At

least three different types of adjustments are necessary.

(a) The first is an adjustment to the base model coefficients to represent

differences in local technology from the base model average technology. Such

an alteration requires specialized study of key industries and, when possible,

primary data collection. When this analysis is not possible, the only alternative is to accept the base model average technology as being a reasonably

accurate description of regional processes.

(b) The second adjustment to be made is for industry product mix. Every I-O

table is really a coirposite of several more finely disaggregated sectors. For

102
exanplGf assume that the leather gcxx3s inanufacturing sector is really a

conposite of the shoe/ belt/ and handbag industries. Suppose data are available in the base nodel regarding the purchases and sales of each of these less

aggregated industries. Furthermore/ suppose it is desirable to group these

three industries into one leather goods manufacturing sector at the regional

level. Then the desired regional purchase and sale coefficients should reflect the proportions in which the three subsectors are represented regionally/

rather than the prcportions in which the subsectors are present in the State

or national economy» Ihis means that aggregated regional technical coefficients should be weighted averages of less aggregated regional coefficients/

where the weights are determined by the estimated gross output of each less

aggregated industry in the region.

(c) The third and final type of adjustment to be made to the coefficients is

to account for interregional trade. Depending upDn the industry and region/

this may be the most critical coefficient adjustment of all. In the U.S. econony as a whole/ external trade is such a small prcî>Drtion of total transactions

that it may be effectively ignored. A small regional econoiry/ on the other

hand/ is much more open. That iS/ it is much more dependent upDn trade with

other regions in the purchase of needed commodities and the sale of regional

production.

What does this greater dependence inply in terms of estimating the regional

purchase and sale coefficients? In the case of inportS/ the income and enployment generated by production of the imported goods accrues to regions other

than the study area. In the case of exports/ the fact that regional production

is escorted rather than consumed in intermediate final uses within the region

means that the income and enployment associated with the further processing

and consunption of the goods accrue outside the study region. Both import and

e^qport considerations inply that the base model interindustry transactions

coefficients mast be reduced in estimating the regional coefficients. For the

sake of sinplicity/ this report ignores the possibility of interregional trade

interactions (that iS/ feedbacks between regions as a result of expansion in

the study area). For small regions/ this sinplification probably sacrifices

little in terms of accuracy.

There are a number of ways to incorporate interregional trade flows into the

analysis/ several of vrtiich have been used by ESCS researchers. One procedure

is an employment based location quotient. This technique reduces the base

model sales coefficients of an industry by the ratio of the proportion of total

enployment in that industry locally to the proportion of total enployment in

that industry in the base region. A second approach is the use of the supplydemand pool technique/ or a modified form of that technique. This method

alters the base model sales coefficients for an industry by the ratio of total

product demanded locally to total local production of that industry. Several

other techniques/ including cross-industry quotients and biproportional matrix

adjustment have been explored by ESCS staff but are not now used to estimate

the effects of interregional trade on the transactions coefficients.

103
(4) Estimation of Final Deinand and Value Added

Regional final demands are estimated by ESCS economists as three subaggregates

for each industry: personal consuirption expenditures^ exports, and other final

deniand»

(a) Estimation of ODnsunption is quite similar to the technique described

above for adjusting the transactions coefficients for external trade. The relationship between consuirption and gross output in the base model is adjusted

according to area income, enplcyment, or some combination of the two.

(b) E5Çorts are estimated in the adjustment procedure described previously in

the discussion of the region's external trade. Any excess of estimated gross

output over regional demand represents an export from the region.

(c) Other final demands cor^sist of regional investment, net inventory change,

and Federal, State, and local government purchases in the area. Quantitatively

speaking, these categories of final demand are not usually very important in

the region. Therefore, they are usually treated as a residual, or are estimated directly from the relationship between these demands and gross output in

the base model.

Value added in the region is also disaggregated into three categories, and is

estimated in a fashion similar to that used in estimating final demand. The

three subaggregates are industry payments to households, imports, and other

value added.

(a) Household value added is estimated from the base model relationship between this variable and gross output, taking into account regional differences

in income and employment.

(b) Inports are estimated from the trade adjustments discussed previously.

Any excess of estimated local purchases over regional production represents an

inport into the region.

(c) Other value added consisting primarily of depreciation, taxes, and payments to households outside the region is estimated as a residual.

Conclusions

On balance, this nonsurvey approach to estimating regional I-O models represents a relatively cost effective means for performing regional analyses. It

is no doubt less accurate than survey based methods, but it is also much less

expensive. It is probably at least as accurate for inpact studies as the use

of standardized multipliers, and is much more flexible in that the estimated

regional model can be used for other types of analyses where standardized

multipliers are of little use.

104
APPENDIX G: DISPLAY OF IMPACTS OF PLAN IN PRINCIPLES AND STANDARDS ACCOUNT

by Clifford Jones and Sterling Stipe

Table 24—Regional development account: Estimated impacts of project installation, alternative Plan A, Project X, years 1-3

o

Beneficial effects 1/ : Adverse effects 1/

Project activity :

Component : Measure of effects : Component : Measure of effects

Project installation

1. Channel construction: A. Increase in output Sector 1,000 dollars A. Regional output Sector 1,000 dollars

and farm drainage > 1. Value of increased output

Livestock

Other3J .62 1. Region's share

of project

Livestock

OtherA/ 0

of goods and agriculture 2.48 costs agriculture . 0

services Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinaneeinsurance-real

estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

2.85

13.04

1,104.60

1.68

318.23

16.09

96.83

102.67

84.88

1,743.50

1,100.00

643.50

Agricultural

services

Mining _

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurance-real

estate

Retailwholesale

Services

Total effects _

Direct effects _

Indirect

effects _

0

0

0

0

0

0

0

0

0

0

0

0

See footnotes on page 123. Continued
Table 24--Regional development account: Estimated impacts of project installation,

alternative Plan A, Project X, years 1-3—continued

Project activity

o

Beneficial effects 1/

Component Measure of effects

Adverse effects 1/

Component

2. Loss of output

from project

displaced

resources

Measure of effects

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

5/

See footnotes on page 123. Continued
Table 24—Regional development account: Estimated impacts of project installation,

alternative Plan A, Project X, years 1-3—continued

Project activity

o

Beneficial effects 1/

Component Measure of effects

Adverse effects 1/

Component Measure of effects

Sector

1,000

dollars

Losses due to Livestock ^1

reduced

assistance

Otheragriculture

pairments from

sources outside

Agricultural

services

the region to Mining

otherwise Construction

unemployed or

underemployed

Manufacturingfood

resources. Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

See footnotes on page 123. Continued
Table 24—Regional development account: Estimated impacts of project installation,

alternative Plan A, Project X, years 1-3—continued

o

00

Project activity

; Beneficial effects 1/ : Adverse effects 1/

: Component : Measure of effects : Component : Measure of effects

Project installation

1. Channel construction

and farm drainage

: B. Employment

: 1. Increase in

: man-years of

: employment

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufac turingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurance-real

estate

Retailwholesale

Services

Total effects

Direct Effects

Indirect

effects

Number

- .038 B. Employment

1. Loss in man-

.151 years of

employment

.060 due to proiect

.874 installation

32.033 costs

.037

16.548

.708

2.421

6.674

5.263

64.757

31.900

32.857

Sector Number

Livestock A/

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufac turingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

See footnotes on page 123. Continued
Table 24—Regional development account: Estimated impacts of project installation,

alternative Plan A, Project X, years 1-3—continued

Project activity Beneficial effects 1/

Component Measure of effects

Adverse effects 1/

Component Measure of effects

Loss of manyears of

employment due

to project

displaced

resources

o

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufac tur ingwood

Transportationfinanceinsurance-real

estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

Number

5/

See footnotes on page 123. Continued
Table 24—Regional development account: Estimated impacts of project installation,

alternative Plan A, Project X, years 1-3—continued

Project activity

Beneficial effects 1/

Component Measure of effects

Adverse effects 1/

Component Measure of effects

Sector

3. Employment losses Livestock

due to reduced Otherassistance paj^ments agriculture

from sources outside Agricultural

the region (man-years) services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceins urance-real

estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

Number

6/

See footnotes on page 123. Continued
Table 24—Regional development account: Estimated impacts of project installation,

alternative Plan A, Project X, years 1-3—continued

Project activity

Beneficial effects ll . Adverse effects ll

Component ' Measure of effects : Component : Measure of effects

C. Income

1. Increase in

household

income

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

8/ .157

.903

.875

5.764

290.510

.227

88.468

6.211

35.827

40.555

35.140

504.250

289.300

214.950

C. Income

1. Loss of income

due to region's

share of project

installation

costs

1,000

Sector dollars

Project installation

1. Channel construction

4/ Livestock ~

and farm drainage Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturing- '

other

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

See footnotes on page 123. Continued
Table 24—Regional development account; Estimated impacts of project installation,

alternative Plan A, Project X, years 1-3—continued

Project activity Beneficial effects 1/

Component Measure of effects

Adverse effects 1/

Component : Measure of effects

2. Loss of income

1,000

Sector dollars

Livestock —'

due to project

displaced

Otheragriculture

resources within

region

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

See footnotes on page 123. Continued
Table 24~Regional development account; Estimated impacts of project installation,

alternative Plan A, Project X, years 1-3—continued

Project activity

Beneficial effects \l

Component Meas ure of effects

Adverse effects \J

Component

Loss of income due

to reduced

assistance payments

from sources outside

the region

Measure of effects

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

6/

See footnotes on page 123.
Table 25—Regional development account: Estimated impacts of project associated activities,

alternative Plan A, Project X, years 4-8

4^

Project activity ; Beneficial effects 11 Adverse effects 1/

: Component : Measure of effects Component : Measure of effects

Project associated Ij

1. Channel construction

and farm drainage

: A. Increase in output

: 1. Value of in-

: creased output

: of goods and

Î services

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

-^^371.16

305.40

44.32

8.53

617.67

1,206.75

333.75

12.67

205.71

148.71

150.08

3,404.75

1,919.90

1,484.85

A. Regional output

1. Loss of output

from land use

changes due to

better drainage

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

10/

See footnotes on page 123. Continued
Table 25—Regional development account: Estimated impacts of project associated activities,

alternative Plan A, Project X, years 4-8—continued

Project activity Beneficial effects 1/

Component Measure of effects

Adverse effects 1/

Component Measure of effects

B. Employment

1. Increase in

man-years

of employment

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

Number

-Ü/22.641

18.629

.931

.572

17.912

26.549

17.355

.557

5.143

9.666

9.305

129.260

59.647

69.613

B. Employment

1. Loss of manyears of

employment due

to project

induced land

use changes

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufac turingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

Number

10/

See footnotes on page 123. Continued
Table 25—Regional development account: Estimated impacts of project associated activities,

alternative Plan A, Project X, years 4-8

Project activity Beneficial effects 1/

Component

Income

1. Increase in

household

income

Measure of effects

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

^4.275

111.166

13.615

3.770

162.470

162.911

92.783

4.891

76.113

58.740

62.133

842.867

392.486

450.381

Adverse effects 1/

Component

Income

1. Loss of household

income due to

project induced

land use changes

Measure of effects

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufac turingfood

Manufacturingother

Manufac turingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

10/

See footnotes on page 123.
Table 26—Regional development account: Estiinated impacts of project associated activities,

alternative Plan A, Project X, years 9 through life of project

Project activity

Project associated 2l

1. Channel construction

and farm drainage

A. Increase in output

1. Value of increased output

of goods and

services

Beneficial effects 1/

Component Measure of effects

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

j^^763.64

626.21

714.29

2.92

31.21

2,479.31

321.41

8.02

314.55

190.74

213.48

5.047.86

2.715.40

2.332.46

Adverse effects ll

Component

Regional output

1. Loss of output

from land use

changes due to

better drainage

Measure of effects

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

10/

See footnotes on page 123.

Continued
Table 26—Regional development account: Estimated impacts of project associated activities,

alternative Plan A, Project X, years 9 through life of project—continued

Project activity Beneficial effects 1/

Component Measure of effects

Adverse effects 1/

Component Measure of effects

Employment

1. Increase in

man-years of

employment

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufac turingother

Manufac turingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

Number

14/ 46.582 B.

38.200

15.000

.196

.905

54.545

17.129

.353

7.864

12.398

13.236

206.408

86.992

119.416

Employment

1. Loss of manyears of

employment

due to project

induced land

use changes

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurance

real estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

Number

10/

See footnotes on page 123. Continued
Table 26—Regional development account: Estimated impacts of project associated activities,

alternative Plan A, Project X, years 9 through life of project

Project activity Beneficial effects 1/

Component Measure of effects

Adverse effects 1/

Component Measure of effects

C. Income

1. Increase in

household

income

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufac turingfood

Manufac turingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

15/

1,000

dollars

193.965

227.940

219.287

1.291

8.208

334.707

91.576

3.096

116.384

75.342

88.381

1,360.177

483.176

877.001

Income

1. Loss of household

income due to

project induced

land use changes

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurance

real estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

10/

See footnotes on page 123,
Table 27—Regional development account: Estimated impacts of project OM&R, alternative Plan A, Project X,

year 4 through life of project

O

Project activity

I Beneficial effects 1/ Adverse effects 1./

: Component : Measure of e ffects Component : Measure of effects

Project OM&R A. Increase in output

: 1. Value of in-

: creased output

of goods and

Î services due

: to OM&R

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

16/ A. Regional output

1. Region's share

of OM&R costs

1,000

Sector dollars

Livestock —

1. Channel construction

and farm drainage

Otheraßriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

See footnotes on page 123. Continued
Table 27—Regional development account: Estimated impacts of project OM&R, alternative Plan A, Project X,

year 4 through life of project—continued

Project activity

Beneficial e ffects 1/ Adverse effects 1/

Component : Measure of effects Component Measure of effects

B. Employment

1. Increase in manyears of employment due to OM&R

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

Number

16/ B. Employment

1. Loss of man-years

of employment due

to region's share

of OM&R costs

Sector Number

Livestock —

Otheragriculture

Agricultural

services

Mining

Construction

Manufactur ingfood

Manufac turingother

Manufac turingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

See footnotes on page 123. Continued
Table 27—Regional development account: Estimated impacts of project OM&R, alternative Plan A, Project X,

year 4 through life of project

Project activity

to

Beneficial effects 1/

Component Measure of effects

Adverse effects 1/

Component Measure of effects

C. Income

1. Increase in

household

income due

to OM&R

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufacturingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

M/ c. Income

1. Decrease in household income due to

regiones share of

OM&R costs

Sector

Livestock

Otheragriculture

Agricultural

services

Mining

Construction

Manufacturingfood

Manufac turingother

Manufacturingwood

Transportationfinanceinsurancereal estate

Retailwholesale

Services

Total effects

Direct effects

Indirect

effects

1,000

dollars

16/

See footnotes on page 123.
Footnotes to Table 27

\l Annual effects, not amortized or discounted (with reference to costs and

benefits, respectively).

_2/ Private business activity generated by projects after installation is completed.

Private investment stimulated and encouraged by the government funded channel construction and related economic activity that is expected to extend well beyond the project

installation period, such as increased farm production within the region resulting from

local farmers installing onfarm drainage to take advantage of the drainage outlet provided by the new government constructed channel.

_3/ Column entries for each sector were obtained by multiplying the construction

column of the inverse matrix times the-$l.l million change in final demand for construction output. Total effects were obtained by multiplying the construction

sector's output multiplier times the-$l.l million change in final demand. The sum of

individual column entries will not exactly equal total effects because of rounding involved in the two procedures. Source: table 12.

k_l The region incurred no direct adverse effects since all channel construction

costs were borne by the Federal Government. The secondary effects incurred due to the

channel construction costs are considered beneficial economic activity.

_5/ Channel construction of Plan A displaced no resources; however, where project

installation does displace resources, such as loss of cropland due to permanent inundation in the reservoir pool area of a flood protection and/or water supply structure,

such reduction in output due to displacement should be estimated and evaluated similarly to an output increase for the region.

6^/ Any reductions in household income of this nature should be accounted for and

assessed via the I-O model. This was not illustrated in the report, such changes in

income would be converted to changes in personal consumption for each sector of the

1-0 model economy and assessed as reductions in final demand, similar to the way increases in final demand are handled.

IJ The sum of column entries and total effects will not equal because of rounding.

Source: table 16.

8^/ The sum of column entries will not equal total effects because of rounding.

Source: table 18.

^/ The sum of column entries will not equal total effects because of rounding.

Source: table 13.

10/ Adverse effects of project induced land use changes were not considered in the

hypothetical example, but in actual project analysis they should be assessed and displayed as indicated.

11/ The sum of column entries will not equal total effects because of rounding.

Source: table 16.

12/ The sum of column entries will not equal total effects because of rounding.

Source: table 18.

13/ The sum of column entries will not equal total effects because of rounding.

Source: table 14.

14/ The sum of column entries will not equal total effects because of rounding.

Source: table 16.

15/ The sum of column entries will not equal total effects because of rounding.

Source: table 18.

16/ Operation, maintenance, and repair costs and effects were not considered in the

hypothetical example, but would be evaluated via 1-0 similar to project installation

expenditures. Effects could be displayed by sector as indicated for output, employment, and income.

123
Table 28—Summary of regional effects of Plan A, Project X, on output, employment, and income, by time period ll

Time period

Years 1-3:

Total

Direct

Indirect

Years 4-8:

Total

Direct

Indirect

Years 9 on: _2/

Total

Direct

Indirect

Beneficial effects

Output : Employment : Income

Adverse effects

Output : Employment : Income

Net effects (gain or loss) 3/

Output Employment Income

Project costs

Federal Regional

1,000

dollars

1,743.5

1,100.5

643.5

3,408.0

1,921.6

1,486.4

5,047.9

2,715.4

2,332.5

Man-years

64.8

31.9

32.9

129.3

59.7

69.6

206.4

87.0

119.4

-1,000 dollars504.3

289.3

214.9

842.9

392.5

450.4

1,360.2

483.2

877.0

Man-years 1,000 dollars— Man-years -1,000 dollars1,000

1/ Estimated effects and costs are on an annual basis, and include all project effects assessed intables 16 and 18.

2/ Life of project.

3/ The adverse effects of the project were not estimated in this report so the net effects are not shown.
Table 29—Social well-being account: Estimated impacts of project installation, alternative Plan A, Project X, years 1-3

Project activity

Project installation

1. Channel construction

and farm drainage

Beneficial and adverse effects 1/

Component Measure of effects

Real income distribution 1. Create 65 man-years of low to medium income jobs for area

residents. Ij

2. Create regional income benefit distribution of $504,250 by income

class as follows: 2/

Income class

(dollars)

Less than 3,000

3,000 - 10,000

More than 10,000

Total

Dollars of project generated

household income accruing to

each income class

28,500

379,257

96,493

504,250

Percentage

benefits

in class

5.65

75.21

19.41

100.00

3. Local project costs to be borne by region total $0 with allocation

of costs by income class as follows:

Income class

(dollars)

Less than 3,000

3,000 - 10,000

More than 10,000

Total

Dollars of project costs

borne by each income class

Percentage

contributions

in class

See footnotes at end of table 32.
Table 30—Social well-being account: Estimated impacts of project associated activities, alternative Plan A,

Project X, years 4-8

Project activity

Beneficial and adverse effects 1/

Component Measure of effects

Project associated

1. Channel construction

and farm drainage

A. Real income distribution Create 129 man-years of low to medium income jobs for area

residents. Ij

Create regional income benefit distribution of $842,700 by income

class as follows: 2/

Income class

(dollars)

Less than 3,000

3,000 - 10,000

More than 10,000

Total

Dollars of project generated

household income accruing to

each income class

210,000

420,000

212,700

842,700

Percentage

benefits

in class

24.92

49.84

25.24

100.00

3. Local project costs to be borne by region total $0 with allocation

of costs by income class as follows:

Income class

(dollars)

Less than 3,000

3,000 - 10,000

More than 10,000

Total

Dollars of project costs

borne by each income class

Percentage

contributions

in class

See footnotes at end of table 32,
Table 31—Social well-being account: Estimated impacts of project associated activities, alternative Plan A,

Project X, years 9 through life

Project activity

Beneficial and adverse effects 1/

Component Measure of effects

Project associated

1. Channel construction

and farm drainage

A. Real income distribution

to

Create 206 man-years of low to medium income jobs for area

residents. _2/

Create regional income benefit distribution of $1,360,177 by income

class as follows: 2/

Income class

(dollars)

Less than 3,000

3,000 - 10,000

More than 10,000

Total

Dollars of project generated

household income accruing to

each income class

408,053

544,070

349,981

1,360,177

Percentage

benefits

in class

30.00

40.00

30.00

100.00

3. Local project costs to be borne by region total $0 with allocation of

costs by income class as follows:

Income class

(dollars)

Less than 3,000

3,000 - 10,000

More than 10,000

Total

Dollars of project costs

borne by each income class

Percentage

contributions

in class

See footnotes at end of table 32.
Table 32—Social well-being account: Estimated impacts of project OM&R, alternative Plan A,

Project X, years 4 through life

Project activity

Beneficial and adverse effects 1/

Component Measure of effects

Project OM&R ll

1. Channel construction

and farm drainage

Real income distribution

to

CO

1. Create man-years of low to medium income jobs for area residents.

2. Create regional income benefit distribution of $ by income class

as follows :

Income class

(dollars)

Less than 3,000

3,000 - 10,000

More than 10,000

Total

Dollars of project generated

household income accruing to

each income class

Percentage

benefits

in class

Local project costs to be borne by region total $ with allocation

of costs by income class as follows:

Income class

(dollars)

Less than 3,000

3,000 - 10,000

More than 10,000

Total

Dollars of project costs

borne by each income class

Percentage

contributions

in class

jL/ Effects are on an annual basis.

2/ Distribution of employment and income generated by project is based on arbitrary assumptions, in actual project analysis,

earnings and skill groups could be examined for each economic sector, and employment and income changes could be allocated within

sectors according to current situation and then totaled for the whole economy.

3_l Not estimated for OM&R in hypothetical example but in actual project should be assessed.