Local Purchase Percentage (LPP) and Regional Purchasing Coefficients (RPC) are two of the most frequently misused and misunderstood values in IMPLAN. This article describes what these concepts mean and when they should be changed from the default settings.
LPP IN INDUSTRY EVENTS:
Local Purchasing Percentages (LPP) indicates to the software how much the Event impact affects the local Region and should be applied to the Multipliers. The key thing to remember when considering Local Purchase Percentage is that the LPP modifies only the Event values, and it does this before those values are applied to the Multipliers. If we have properly defined the Region, then in most circumstances all of the Industry Production we are modeling occurs within our selected geography and thus LPP should be 100%. When LPP is less than 100%, the remaining portion (or 1-LPP) is then assumed to be affecting a different Region. The portion happening outside the Region of your analysis does not create any local effect.
Local Purchase Percentage describes the amount of the Direct Effect that is taking place within the Region. For example, if we are constructing a building in a county, all the construction activity takes place in that county, even if all the laborers and the requirements for the building are not sourced in the county, so LPP should be 100%. Likewise, if the operations of new or expanded business are occurring entirely inside our county, even if their employment or materials are sourced elsewhere the LPP should be 100% because the business operations themselves are local.
Changing LPP from 100% in an Industry Event is infrequently appropriate, but one classic example is that of airline ticket purchase. Although $850 may be spent on a ticket, the cost associated with that ticket is divided between the point of origin and destination. Therefore the total budget spent on airline tickets for a business trip may be $850, but the local airport only incurs half of the associated cost.
- A Local Purchase Percentage of 100% means that all of the Industry Production is occurring within the Model region and all the Employment occurs within the Model region.
- By definition in Input-Output, Employment is at the site of work, so all employees, regardless of where they live, are counted as employment for the region if they work at a site within the region.
- Considerations of where an employee lives are taken into account by means of the Employment Compensation and Proprietor Income fields. (Please see the Related Articles section on the topic of Commuting).
LPP IN COMMODITY OUTPUT EVENTS:
Again, Local Purchasing Percentages (LPP) indicate to the software how much the Event impact affects the local Region and should be applied to the Multipliers. The key thing to remember when considering Local Purchase Percentage is that the LPP modifies only the Event values, and it does this before those values are applied to the Multipliers. When LPP is less than 100%, the remaining portion (or 1-LPP) is then assumed to be effecting a different Region. The portion happening outside the Region of your analysis does not create any local effect.
Commodity Output Events are typically used to model a purchase or purchases of a certain Commodity. When the Commodity is known to be produced locally in the Region, leaving LPP at 100% is appropriate. It is common that the location of production of a purchased Commodity is unknown, in which case you can let IMPLAN determine what portion of the production may affect the local Region by selecting the SAM Checkbox next to the LPP field in the Advanced Menu.
LPP IN SPENDING PATTERN EVENTS:
Industry and Institutional Spending Patterns start the analysis, not from the standpoint of the sales or Employment of the Industry or Institution, but instead from the budgetary purchases made by the local organization.
LPP in an Industry or Institutional Spending Pattern tells the software what portion of the line item Commodity was purchased locally and therefore affects the local Region. When LPP is less than 100%, the remaining portion (or 1-LPP) is then assumed to be effecting a different Region. The portion happening outside the Region of your analysis does not create any local effect.
Unlike the Industry or Institution itself, we typically cannot say where the production, transport, and wholesaling of the items purchased by our target organization was sourced, and we would not want to assume that these are local purchases. Since this methodology, unlike an Industry Event or Commodity Event, starts not from the Industry or Commodity itself, but from the first round of Intermediate Expenditures, the LPP on these purchases needs to reflect local availability. Thus the LPP is by default set to the SAM Model Value. You would only want to change the LPP on the Commodities within a Spending Pattern if you had information on where the Commodity was produced.
To help envision this more clearly, we can take a look at a quick example to see how the software uses Local Purchase Percentage.
- An Event for Sector 12 Dairy Farming has shows the following:
- Industry Sales: $1,000,000
- Employment: 6
- If Local Purchase Percentage is set to 50% then the Direct Effects will be $500,000 of Output and 3 jobs. Why?
- To calculate, the software first multiplies the Industry Sales value by the Local Purchase Percentage ($1,000,000 * 0.50 = $500,000)
- The software then recalculates the Employment and Labor Income based on this adjusted Industry Sales value, which is half of the entered value and thus generates half the Employment and Labor Income.
- Deflators are applied to adjust the entered value down to the year of the data set. This makes the dollar values used to calculate the Multipliers equivalent to the entered dollar values.
- The resultant value is applied to the Multipliers to determine the Indirect and Induced Effects.
- Thus, the LPP does not provide any information about any of the items purchased by the Sector in the Event field. Regional availability of Intermediate Expenditures and Indirect Effects are determined by the Regional Purchasing Coefficient.
A Regional Purchasing Coefficient (RPC) is the percent of Total Demand that is met by Local Supply. In more detail, it is the proportion of the Total Demand for a Commodity, by all users in the Region, that is supplied by producers located within the Region. The RPC is the value used when LPP is set to the SAM Model Value.
For example, if the RPC for the Commodity fish is 0.8, then 80% of the demand by local fish processors, fish wholesalers, and other fish consumers are met by local fish producers. Conversely, 20% (1.0-RPC) of the demand for fish is satisfied by imports.
The RPC value is derived from the Trade Flow Model that looks at the movement of Commodities domestically and known rates, by Commodity, for foreign trade. The RPC value tells us, for every Commodity we purchase, how much of our total requirement for that Commodity is obtained from local sources according to the Region and Year of the Data Set. This value is built into the Multipliers, so you never need to make any adjustments to your Event to account for locality of the goods and services required for your production.
The RPC does not assume that all local production goes to local demand (i.e., Regional Supply Coefficient (RSC) may not be 100%). Each Commodity’s RPC can be found in Regions Overview > Social Accounts > Reports > Commodity Summary, Average RPC column. Values for the RPC are between 0 and 1. Also, the LPP is equal to RPC only when the regional availability of the product is unknown. RPC values cannot be changed in app.implan.com.
Written August 23, 2019