Calculating direct effects after ABP



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    One follow up question… Our indirect and induced effects results are very large, relative to the direct effects, even without reducing the direct effects based on the LPP given. I assume this is the result of the very large amount of spending on equipment purchases, which are all being modeled as an industry spending pattern. Is that correct? Our jobs multiplier for the construction project, for example, is somewhere around 3.2, which is much higher than what I am used to. I just want to make sure I understand why that is happening.
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    IMPLAN Support
    Hello Monica, Can you describe what is meant by "One Industry Spending pattern for all known equipment purchases"? Equipment purchases that the facility will use once construction is complete (capital expenditures) do not need to be treated like an imported spending pattern. These purchases are a Final Demand and can be captured through a standard Industry Change activity. It is important to know both where and how the items were purchased. • Purchases made locally create local impact and can be measured. Purchases made outside the region do not have a local impact and cannot be measured. While you could impact a sector for the full cost of a piece of equipment and adjust the LPP to the appropriate portion purchased locally, this is equivalent to simply entering only the locally purchased cost and leaving LPP at 100% (which we recommend). Using the Local Purchase Percentage Field • Purchases made from a wholesaler or retailer need to be properly margined. See the links below for proper directions. Applying Margins to Retail and Producing Sectors Margining: When the Item Being Purchased is Known Margining: When the Item Being Purchased in Unknown The construction sector spending pattern represents the expenditures related to the construction of the structure. Payments to equipment sectors represent equipment utilized in the construction of the structure, not equipment to be utilized by the structure. If the intent in removing the "known" equipment sectors was to not duplicate purchases from the expenditures on the manufacturing facility's equipment mentioned above, then removal of the equipment sectors in the spending pattern for construction is not required as they represent a different type of equipment. If you follow the steps mentioned above for the equipment purchases (utilizing an Industry Change activity), you will receive Direct Effects for that portion of your study (which we refer to as Furniture, Fixtures, and Equipment). For your construction portion (the labor income change and the construction spending pattern), this is an Analysis-by-Parts (ABP). As an ABP begins at the first wave of Indirect Effects (Spending Pattern) and the first wave of Induced (Labor Income Change), there is no Direct Effect recorded by the model. The Basics of Analysis-By-Parts Case Study: Analysis-By-Parts Output = Intermediate Expenditures (IE) + Value Added (VA) VA = Proprietor Income (PI), Employee Compensation (EC), Taxes on Production and Imports (TOPI), and Other Property Income (OPI). Note: Employee Compensation (EC) is wage and salary, benefits, and both employee and employer paid payroll taxes. You will need to determine your Direct Effect for the Construction portion of your study by taking note of your known values. Is your construction cost just the cost of expenditure and labor, or is it the total cost (does it include taxes and profit)? Based on your above mentioned equation (23% wage, 13% site prep and construction, and 9% Engineering and Architecture), you have a cost of $90 million for just the construction. However, the current split of this cost does not appear to include TOPI (taxes) or OPI (profits). If you were to use your current values, your current VA would equal your EC and your Output would equal your IE and VA (just EC in this case) combined. This is a situation that is typically only true with non-profits. Consider looking at the industry balance sheet for the sector and comparing the ratios of the different VA components to Output to your values. Also, is the employment number provided by the company related to the operations of the chemical plant, or are they the number of employees required for the construction project? It appears that you are only analyzing the impact of equipment purchases and structure construction, in which case the chemical plant's number of annual employees has no relevance. If you need to estimate an employment for the construction, you can create an Industry Change activity, create an event, select the construction sector, and enter your Employee Compensation value. This will estimate the amount of construction employment relevant to that level of Employee Compensation. It is not common that large equipment purchases are also locally produced. If you are seeing large amounts of employment related to the producers of your capital equipment, correctly following the margining articles linked above should improve your analysis. Regards, IMPLAN Staff

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