Economic impact

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 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.

Description

The scope of economic impact depends on the function (e.g., a mobility function or a residential function) of an is caused by::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. It considers profits in relationship to capital invested generated by sales income, real estate value, local spending by tourists, etc. These examples already suggest that a lot of categories of economic impacts can be defined, within the spectrum of urban planning and security.

Hence, we defined the following categories of economic impact:

• The economic impact of urban planning
• The economic impact of security threats
• The economic impact of security measures
• The economics of crime and terrorism

Security economics

• The economic impact of security threats (crime or terrorism) is mostly negative due to the damage on buildings, infrastructure, human beings, and so on.
• The goal of security measures is to mitigate the 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.

Hence, there are three different (sub)dimensions with regards to security in an urban environment are of paramount importance for the urban planner.

The relevance of economic impact for urban planners

Economic impact(costs and benefits) of urban development (and security threats) 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.

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

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

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.

Related subjects

Types of economic impact:

• Economic impact of urban planning
• Economic impact of security threats
• Economic impact of security measures
• Economics of criminal and terrorist behaviour

Other related subjects:

• Economic output
• Economic tools

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