Economic impact

Economic impact

Governments, as well as private parties, develop many ambitious ideas and plans for spatial development and new infrastructure. Hence, one regularly reads in the news about claims that the development of a new urban area creates X jobs in an area or that a big sport venue generates Y million Euros in sales or income in a community, et cetera. This kind of quantitative insights in the economic impact (costs and benefits) of urban development are touted by parties for a variety of reasons:

1. First of all, public investments need to be substantiated and accounted for, and furthermore the desirability and necessity of the investment has to be very clear.
2. Secondly, also private investors need to know if an investment decision will generate enough future cash flow in relationship to the invested capital (return on investment).
3. Finally, claims of real estate developers, construction industry and other connected industries about their economic significance, give these industries greater respect among the business community, public authorities, and the public in general.

The scope of economic impact depends on the function (e.g., a mobility function or a residential function) of an urban object/environment, and is usually generated by capital costs for the construction and maintenance part, and on the other hand by the return on investment generated by sales income, real estate value, local spending by tourists, et cetera. These examples already suggest that a lot of different economic impacts can be defined, within the spectrum of urban planning.

Definitions

Impact

An impact implies a clear and unilateral causality between two notions.

Economic impact

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 output: value added, wealth, personal income (wages), public income and expenditures or employment levels (economic output).

Categories of economic impact

Economists use various definitions and terminology for categorizing economic impacts. The two main categories of economic impact are primary and secondary economic impacts, also referred to as direct and indirect economic impact.

Primary economic impact (or direct effects) are generally defined as the initial, immediate economic output generated by a specific urban project development. The construction company in charge of building the urban object, for example, will pay its employees and will pay its suppliers. The user of the urban object will gain utility from the use of the particular urban object.

Secondary economic impact (or indirect effects) are generated each time a subsequent transaction is made. The suppliers of the construction company responsible for the construction of the urban project, for example, will also pay their employees and will buy supplies from subsequent suppliers. Furthermore, the employees will spend their wages on housing and other consumption goods and services. These are all examples of secondary economic impacts. 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. An example:

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.

Economic impact versus social impact

Economic impact is primarily aimed at the costs and benefits induced by an urban project development plan, including transaction costs and public budget effects. 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.

Flowchart economic impact of urban planning in a security environment

With respect to security, however, three different (sub)dimensions of economics are of paramount importance for the urban planner. Thes subdimensions are:

• The economic impact of security threats due to crime and terrorism;
• The economic impact of security measures and;
• The economics of criminal and terrorist behaviour.

Related subjects

• Economic impact can be measured with economic tools.
• Economic impact may be viewed (or measured) in terms of economic output.

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