Contribution analysis is a method used to estimate the value of a Sector or group of Sectors in a region, at their current levels of production. While the focus of the analysis still looks at backward linkages, the purpose of this analysis differs.
When considering the Indirect and Induced Effects of an impact analysis, we are looking at how industries in our region will respond to a change in the key industry or industries being modeled in our Events. Contribution analysis, shifts this framework to see what industries and what level of production in these industries is being supported by the current activity of the target Sector or Sectors in our region.
It is important to distinguish too, the differences between methodologies and verbiage, as defined below.
- Impact is the term used to denote a change in the economic conditions of the regional economy. This could be a change that increases or decreases current production, employment, taxes, etc. The Impact Method is used when conducting an impact analysis.
- Contribution is a term that is used to denote that the study is looking at how the current state of industry supports other businesses in the local economy. When this involves a single firm, the Impact Method is used for this type of analysis, but the results are described with different words such as "contributes to" or "sustains".
- Contribution Analysis (Method) is a unique method which affects a constraint upon the Model by "removing" feedback linkages or buy backs to the Industry being analyzed. Typically, this method is used in conjunction with the IMPLAN Study Area Data because you are no longer looking at an individual firm, or a group of firms, but rather an entire Industry Sector. This method can also be used with single firms, but when it is the results of this method should be considered conservative. The Contribution Analysis method comes in two forms:
1) Single Industry which examines the contribution of one Sector to the region.
2) Multi-Industry is used to examine the impacts of multiple related Sectors in a region (e.g. What is the contribution of Agriculture to our local economy).
The Purpose of Constraint
The Contribution Method is used when we are interested in applying constraints so that the Output of a Sector in the Total Results is not larger than the starting value, typically the value reported in the Study Area Report found in the Model Overview in IMPLAN-Online or the Explore menu in IMPLAN Pro.
- For a change in the economy, these additional rounds of Indirect and Induced purchasing make sense and are expected. In effect, we are saying "as a result of a change in production in Sector 4, fruit farming will create additional demand for more production of fruit farming, and will stimulate additional payroll that will also increase demand for fruit farming."
- Looking at the contribution of a single firm that makes up one of many like firms in the region, these additional rounds of Indirect and Induced purchasing also make sense and are expected. In effect, we are saying "as a result of the current levels of production in Sector 4, fruit farming demands additional production of fruit farming, and will contributes to payroll to households that also demand fruit farming."
These buy-backs becomes problematic however, when we are looking at how the Sector in its "current" state supports other businesses in our local economy. If we are trying to determine what Sector 4, not an individual firm, contributes to our local economy, we cannot have the Indirect and Induced Effects creating additional buy backs to Sector 4 in our analysis.
So in this instance our Total Results need to show Output for Sector 4 as being $3,44,914, but if we do not constrain, because fruit farming, the Sector's fruit farming purchases from, and households will all buy fruit farming if there is not constraint the value of Total Output for Sector 4 with be >$3,449,914. This implies not only that the results reflect more Sector 4 production than they should, but as a result of these additional purchases of Sector 4, other Indirect and Induced Effects will be captured and our contribution will overestimate the effect of Sector 4 in our region.
Single vs. Multi-Industry Contribution Analysis
The case described above is looking at a single Sector and its contribution to the region. This use case is relatively simple because the only purchases we need to constrain are the purchases that result from Sector 4's production that cause additional Sector 4 production. As described in this article, a simple mathematical formula can be used to constrain the value entered into the Event's Industry Sales because the value of the buy backs from Sector 4 to Sector 4 is captured in Sector 4's Multiplier.
Because a simple mathematical equation can be used to determine the constrained value of Industry Sales that will yield the value of Study Area Output for Sector 4, this method is available in both modeling systems.
The process of multi-industry contribution analysis is more complicated because it requires not only constraining Sector 4's purchases of Sector 4 but of other Sectors as well. Thus if we wanted to see the impact of crop farming on our region, we need to constrain on the basis of 8 Sectors (since Sectors 7 and 8 aren't present in our region, they aren't included in the constraint).
Now these 8 Sectors need to be constrained not only for the feedback linkages from the selected industry to itself, but from each of the selected industries to all 8 other selected industries, and the resultant feedback linkages from successive rounds of Indirect Effects and household spending. The math involved in the single-region contribution method is no longer sufficient to capture and constrain the scope of potential feedbacks to these 8 Sectors in the region.
To examine this impact, an advanced methodology that allows you to modify the relationships of the underlying region is needed. Modifying the regional data:
- permanently alters the underlying Model, not just the Sector you are changing. This mean you will want to give the Model a specific name to reflect the changes that you have made.
- affects every round of the impact.
- creates a permanent to change to the Multiplier report and the Study Area Data. Unless you note this, this change is invisible once the Model is reconstructed.
- must be done in the order of the Customize menu. If you are changing multiple menu items you must make the changes top down. If you do not follow this order, you will overwrite previous changes.
Because of the advanced level of this technique and the steps required, these features are only available in the advanced version of our software interface, IMPLAN Pro.
The changes made, as described in this article, to the regional data allow us to examine the contribution of multiple industries because if gives us the freedom to make the following changes.
- Zeroing our the RPC's for the Sectors included in the Event list. This ensures that any purchases made from the Event Sectors are imports. In this circumstance, this ensures that when we enter the Study Area Output value for Industry Sales, that the Indirect and Induced Effects for our Event Sectors will be zero.
- Modifying the Commodity Production ensures that no feedback linkages arise from other industries or institutions producing these commodities in the region. This ensures that market shares do not create unanticipated feedback linkages in the analysis.
In making these changes, we can constrain purchases from one industry across multiple other industries, and thus we can constrain how multiple industries interact with one another. Thus while the multi-industry contribution method can be used to estimate a single-industry impact, the single industry method cannot handle the complexities of a multi-industry constraint.
Estimating the Contribution of an Entire Industry
Contribution Analysis will show the impact of your industry on the regional economy. This can be conducted as a Single or Multi-Industry Analysis. However, a Multi-Industry Contribution Analysis can only be performed with IMPLAN Pro. This article will provide the mechanics on conducting a Single Industry Contribution Analysis.
In the Model Overview screen menu select Study Area Data.
Scroll through the sheet to find the IMPLAN sector you are modeling. Record the total Output value. (e.g. For 2013 Washington County, MN, Sector 139 Wood Windows and Doors has a total Output of $401,225,433).
Select the Detail Multipliers tab and then change the drop-down menu to the sector you are modeling. The screen should update to reflect the Multipliers contributing to the selected sector. Record the Type SAM Multiplier for your Industry Sector. (For 2013 Washington County, MN, When Sector 139 Wood Windows and Doors is selected in the drop-down menu, the corresponding SAM Multiplier for Sector 139 is 1.00093806). This DetailedType SAM Multiplier tells us how a specific industry responds to an impact on itself. In a contribution analysis, we want to calculate a Final Demand value such that, using this detailed multiplier, the total output impact on that industry equals its historical output for that year.
Calculate the reciprocal of the Multiplier.
- Divide 1.0 by your Multiplier from the step above. (For 2013 Washington County, MN, When Sector 139 Wood Windows and Doors this would be 1.0/1.00093806 = .999062)
- Multiply the reciprocal value by the region's Total Output for your study sector. (For 2013 Washington County, MN, Sector 139 Wood Windows and Doors this would be 0 .999062*$401,225,433= $400,849,412)
Set the Industry Sales number to (For 2013 Washington County, MN, Sector 139 Wood Windows and Doors this would be $400,849,412).
Create a Scenario by selecting the Scenarios tab
Select Add Scenario
Select the Activity to be analized in the Available Activities box and click the right arrow. This will transfer the Activity from the Available Activities box to the Selected Activities box.
Select Update Scenario
Select Analyze Single Region
- Go to the Detail Results tab, and select the Output tab. Total Output for the sector should be close to or identical to the Total Sector Output recorded from the Model Overview Screen (for 2013 Washington County, MN, Sector 139 Wood Windows and Doors this would be $401,225,433).