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

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

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

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

5. National Use Table Intermediate inputs are commodities purchased by industries Value added is the income earned in production, including labor earnings Total gross output = Intermediate Inputs + Value Added GDP = Σ Value added = Σ Final use; GDP ≠ Total gross output 5

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

7. Information Required from Users Final-demand change Expressed in terms of output, earnings, or employment Changes in demand from final users Personal consumption expenditures (C) ; Investment in new construction, equipment, software (I); Government (G); Exports (X) Final-demand industry Detailed or aggregate Consider project phases Final-demand region Purpose of the study Area of interrelated economic activity Location of industries supplying direct inputs Where most new employees will reside 7

8. Multiplier Selection 8

9. Common Mistakes Not taking offsets into consideration Confusing gross output with regional GDP Confusing changes in investment with intermediate purchases Using final-demand changes in purchaser prices Using a Type II multiplier when a Type I multipliers is more appropriate Averaging or summing multipliers Using multipliers to measure industry contributions 9

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

11. Thank You Rebecca Bess RIMS II Section, Regional Product Division U.S. Bureau of Economic Analysis Phone: 202-606-5343 E-mail: RIMS@bea.gov 11