Input-Output (I-O) Analysis is designed to predict the ripple effect of an economic activity by using data about previous spending. Production in a given Sector in an economy supports demand for production in Sectors throughout the economy, both due to supply chain spending and spending by workers.
In the images of this article, all Private Sectors and Government Enterprises are represented by the red factory icon. In IMPLAN, you have more than 500 Sectors to choose from to specify what type of production you’d like to model.
When consumers purchase goods and services, they create final demand to the Sectors producing the goods and services they consume. When you model consumers spending on a given Sector in IMPLAN, we call this a Direct Effect.
The Sector spends some of this revenue, supporting a ripple effect in the economy. In today’s global economy the ripple effect is worldwide, but IMPLAN allows you to define a US geographic border around the regional economy where you’d like to measure the ripple effect. The spending that does not affect the Region you’ve defined (according to the model) are called leakages, which are represented by the black icons in the figures below (Imports, Government Revenue, and Profit/Capital/Savings).
The blue shopping cart icons represent spending on locally produced goods and services made in the Private Sector or by Government Enterprises. These dollars circulate through the regional economy and support the ripple effect the I-O model estimates.
Indirect Effects are the supply chain effects stemming from the Direct Sector’s purchases of local goods and services and the additional rounds of local business to business spending.
Induced Effects are the effects due to Direct and Indirect workers’ purchases of local goods and services and the additional rounds of spending that stem from their purchases.
The figure below illustrates the first and second rounds of Indirect and Induced Effects. In each round, some dollars are leakages. The IMPLAN model will continue to iterate through rounds of Indirect and Induced Effects until all dollars have leaked out of the economy.
Written September 19, 2019