Economic impact is the unilateral causality between economic notions on the one hand, and outcomes of a private and/or public project, decision, event or policy on the other hand. It may be viewed (or measured) in terms of measurable output: value added, wealth, personal income (wages), public income and expenditures or employment levels, but also in non-financial terms such as the increase of welfare due to a decrease in crime or an increase in leisure activities.
- 1 Description
- 2 Categories of economic impact
- 3 Related subjects
- 4 Footnotes and references
"Economic impacts are effects on the level of economic activity in a given area"(Weisbrod, 1997). In general, economists distinguish direct, indirect and induced economic effects. Direct economic effects are also referred to as 'primary effects' and indirect and induced economic effects are also collectively referred to as 'secondary economic effects'. The total economic impact of a development plan, threat or security measure is the sum of primary and secondary economic effects within a host economy (e.g. a city, county, region or country. These economic effects are viewed or measured with the help of economic tools, and translated in financial and economic (output)terms such as income, financial damage, value added, employment, etc.
Economic impact always refers to the level of economic activity in a certain area (in terms of jobs, income, wealth, etc.) and should not be confused with the monetary value of a willingness to pay by individuals/communities for e.g. safety, leisure, clean air and so on (the economic concept of external impact. Social impact, in contrast, focuses more on the more qualitative effects of a project for society. Examples of social impact of urban planning are: the impact on the quality of life in general, the labour market, crime, safety, health, and so on.
Economic impact of a project development plan
Urban areas (cities in particular) traditionally try to control crime levels and terrorist threats. The economic rationale behind this is that in case the population of urban areas increasingly feel unsafe, they will more and more retreat themselves from public life, causing a negative economic spiral caused by a decrease in public tax income resulting in a decrease in public facilities making cities less and less attractive to live in (causing everybody who can afford it to move outside the cities as what happened in cities like London and Amsterdam in the seventies of the twentieth century. In sum, the economic impact of security threats (crime & terrorism) is mostly negative due to the direct damage to buildings, infrastructure, and population. In addition, crime and terrorism cause negative indirect economic effects that could end up in negative economic spirals as mentioned above. The goal of security measures is to mitigate these economic effects of crime and terrorism, but also security measures create an economic impact, referred to as the economic effects of security measures. Criminals and terrorist, finally, will alter their behaviour in reply to security measures to reach their goal (as much as possible gain against as least as possible costs). In Securipedia we explain this phenomenon in the pages on the economics of criminal and terrorist behaviour.
Categories of economic impact
Securipedia is focusing on the following four subdimensions of economic impact, all regarded of paramount importance for the urban planner:
- The economic impact of urban planning
- The economic impact of security threats
- The economic impact of security measures
- The economics of crime and terrorism
The two main categories of economic impact are primary and secondary economic impacts, also referred to as direct and indirect economic impact.
Primary (direct) economic impact
Primary economic impact (or direct effects) are generally defined as the initial, immediate economic output generated by a specific urban project/program or security event in the home market.
For example: A development program for 500 residential units generates economic impulses in the construction and real estate sectors in the form of jobs, income, business profits and public tax revenues for the involved companies, individuals and public authorities.
Secondary (indirect) economic impact
Secondary economic impact (or indirect effects) are changes in economic activity resulting from subsequent rounds of expenditure ('re-expenditures') of business companies, households and public authorities outside the home market.
For example: The suppliers of the construction companies responsible for the realisation of the 500 residential units will also pay their employees and will buy supplies from subsequent suppliers. Furthermore, the employees of these companies will spend their wages on housing and other consumption goods and services, and also the public authorities will receive income, profit and value added tax.
Below an example how € 1 spent on construction generates € 1 of primary economic output and € 1.19 of secondary economic output in another sector:
Gross and net economic impacts
Economic impact is mostly measured in terms of the urban object’s effect on the level of economic activities in a given area. This is what economists refer to as the gross economic effect, which is not necessarily the same as the net economic impact . The measurement of the net economic impact includes the effects of other activities, policy or events that should be considered as well, especially when they would have had a more prominent function in the urban environment. For instance: The development of an indoor shopping mall will compete with the already existing retail shops. Therefore, the jobs created in the mall will for a substantial part be shifted away from the latter mentioned stores unless the total consumption in the area will increase (e.g. due to an increase in tourism). The net economic impact takes account of the economic impact on all retail stores in the designated area.
Categories of economic impact:
The four subdimensions:
- Economic impact of urban planning
- Economic impact of security threats
- Economic impact of security measures
- Economics of criminal and terrorist behaviour
Other related subjects:
Footnotes and references
- Weisbrod, B and G. Weisbrod (1997): Measuring economic impacts of projects and programs. Economic Development Research Group.
- Jongeneel, R., H. Leneman (eds), J. Bremmer, V.G.M. Linderhof, R. Michels, N.P.B. Polman & A.B. Smit (2009): Impact assessment of economic and social consequences of environmental and nature policies; the development of a framework and a checklist. Wageningen, Statutory Research Tasks Unit for Nature and the Environment. WOt-rapport 96.
- Think, for example, of the security measures on airports which have lead to a decrease in travel time.