Economic Impact Analysis Methodology: A Step-by-Step Guide

Agencies, developers and grant reviewers ask for economic impact analyses all the time, and they are quick to spot one that overstates its numbers. Short answer: a credible economic impact analysis defines a study area, measures the project’s direct spending, and runs it through an input-output model such as IMPLAN or the BEA’s RIMS II to estimate indirect and induced effects. It reports jobs, labor income, value added and output separately for construction and operations, and it is honest about what would have happened anyway. Here is the methodology step by step.

The core terms

Step-by-step methodology

1. Define the question and the study area. City, county, region or state. The smaller the area, the more spending leaks out and the smaller the multipliers.
2. Separate one-time and ongoing effects. Construction is temporary and measured in job-years. Operations recur every year.
3. Build the direct spending profile. Assign each dollar to an industry sector and estimate the share spent inside the study area. Spending that leaves the region creates no local effect.
4. Choose the model. IMPLAN is the most common commercial input-output model. The BEA’s RIMS II multipliers are a government option. Say which you used, the data year and the multiplier type.
5. Run the model and report each effect (direct, indirect, induced) for each measure: employment, labor income, value added and output.
6. Address substitution and displacement. If a new store pulls customers from existing local stores, the net effect is smaller than the gross. Say whether your figures are gross or net.
7. Run sensitivity tests and document assumptions. Show how results change if local purchasing or visitor numbers are lower than expected.

Mistakes reviewers catch

• Headlining output instead of value added. Output double counts intermediate purchases and makes results look inflated.
• Treating construction jobs as permanent. Construction jobs are job-years, not ongoing positions.
• Ignoring leakage. Assuming every dollar is spent locally.
• Ignoring substitution. Counting spending that would have happened in the region anyway.
• Adding economic impacts to a benefit-cost analysis. They measure different things. USDOT guidance says economic impacts are not additive benefits. See our transportation BCA guide.
• No stated model, data year or study area. Without these, nobody can check the work.

Economic, fiscal or benefit-cost?

An economic impact analysis measures activity: jobs, income and spending. A fiscal impact analysis measures what a project does to a government’s revenues and service costs. A benefit-cost analysis measures whether society is better off overall. Many grant applications need two of the three. Our economic impact vs fiscal impact guide explains the differences.

What a good report includes

• A one-page summary with the headline results in value added, jobs and labor income.
• The study area, model, data year and multiplier type.
• Construction and operations results in separate tables.
• Gross versus net effects, with the substitution assumptions explained.
• Sensitivity tests and a sources appendix.

What we would do in your position

1. Decide what the audience needs: a grant reviewer, a city council or an investor each care about different measures.
2. Use conservative local-purchase assumptions. Credibility beats a bigger number.
3. Report value added and jobs first, with output in a supporting table.
4. Work with an economist. GERC is a PhD economist-led firm that prepares economic and fiscal impact analyses for agencies, developers and grant applicants. See our economic consulting services or book a consultation.

Economic impact analysis methodology: frequently asked questions

What is the methodology for an economic impact analysis?

Define a study area, estimate the project’s direct local spending by industry, run it through an input-output model such as IMPLAN or RIMS II, and report direct, indirect and induced effects on employment, labor income, value added and output, with construction and operations shown separately.

What is the difference between IMPLAN and RIMS II?

Both are regional input-output tools. IMPLAN is a commercial modeling platform with detailed industry and household data. RIMS II provides multipliers from the U.S. Bureau of Economic Analysis. Either can produce credible results if the inputs and assumptions are documented.

What are direct, indirect and induced effects?

Direct effects are the project’s own spending and jobs. Indirect effects come from local suppliers’ purchases. Induced effects come from household spending by workers at the project and its suppliers.

Should I report output or value added?

Value added is usually the better headline measure because it reflects the project’s contribution to GDP. Output includes intermediate purchases and can overstate the impact.

Can economic impacts be added to a benefit-cost analysis?

No. Economic impacts measure activity, not net benefits to society. USDOT guidance treats them as separate from additive BCA benefits.