Secondary economic impact
Contents
Secondary economic impact
Secondary (indirect) economic impact are changes in economic activity resulting from subsequent rounds of (re-)expenditure(s) of business companies, households and public authorities directly involved with the specific program/project or security event and trade partners who are indirectly involved (the outsiders). The source of these 're-expenditures' lies in the primary economic impact generated by a program/project or security event. Secondary economic impact is a frequently used category of belongs to::economic impact.
Description
Secondary economic impact is the effect resulting from subsequent rounds of (re-)expenditure of different sectors in the economy. These rounds of expenditure and susequent re-expenditures are also referred to as the 'effects of the first and higher order'. For example: an investment in a school will lead to first order effects (direct effects) and effects of higher order (indirect effects).
In case of a focus on the re-expenditures by households, economists in general call these effects induced economic effects. Employees of companies and public organisations, for instance, earn wages that are spend on food, clothing, shelter and other consumer goods and services. This leads to further indirect transactions throughout the economy.
The relationship between one form of economic activity and the total additional activity generated by a specific project, decision, event or policy are called the '˜multiplier effect".[1] The term multiplier is used since the indirect and induced impacts make the overall economic impact substantially larger than the direct impacts alone[2]. An example: If a major regional plant closes due to e.g. a terrorist event/threat, not only people working at this factory will lose there income, but also supporting industries are hurt by the indirect effects, and in the end, the entire local economy will suffer due to the reduction in regional household income, tax revenues and business profits.
The risk of double counting secondary economic impact
In case of measuring the economic impact of an urban development project, one should measure both the primary and secondary economic impact. However, the secondary impact only has an additional economic effect in case local and regional markets are struggling with market imperfections (e.g., an extraordinary high unemployment rate in a certain sector). An example:
| The construction of a new road leads to a reduction in travel time which is valued at 200,000 euro per year. The reduction in travel time enables a neighbouring company to reduce its production costs with 50,000 euro per year due to its ability to hire experienced employees from outside the region. Another local company reduces its production costs with 25,000 euro due to a reduction in transportation costs. The total impact on welfare in this example will be 250,000 euro. The answer is not 275,000 euro because the 25,000 euro reduction in transportation costs is already included in the 200,000 euro, while the 50,000 euro is additional. Additional because apparently the labour market in this particular region did not function optimal since the company was not able to produce as efficient as possible until one could hire expertise from right outside the region. |
Examples of secondary economic impact
These examples are closely related to the provided examples in the page on the primary economic impact.
Crime
Crime not only leads to financial or physical damage and prevention costs, but also indirectly influences the local/regional and national economy of a country. According to Detotto and Otranto (2010)[3],“crime acts like a tax on the entire economy: it discourages domestic and foreign direct investments[4]. On a macro-economic level crime influences:
- economic growth;
- income;
- labour force participation;
- income spent on security measures; and
- reallocation of resources creating uncertainty and inefficiency.
On a more local and regional level, economists define the following types of impact:
- business impact (crime reduces competitiveness of companies and investments)
- impact on property value
- tourism impact
- impact on quality of life/social capital
According to Tita, Petras and Greenbaum (2006)[5] “crime serves as an important catalyst for change in the socio-economic composition of communities. The effect crime has on the local property value is one of those catalyst effects. A study by Ihlanfeldt and Mayock (2009)[6], for example, concludes that a 10% increase in violent crimes within a neigbourhood is reducing property values by as much as 6%. Other research points out that criminal offences such as vandalism and graffiti (also) have a significant negative impact on real estate prices[7]. Furthermore, in 2011, a UK police website, where users can view the number of criminal offences at street level, led to worries among house owners and real estate agents that the house prices drop if crime rates are relatively high[8]. Another effect of crime is that residents become less committed to their communities, causing the ‘social fibre’ of the community to be weakened. An example of the loss of social capital is that residents of neighbourhoods with a criminal reputation are judged to be associated with criminal activities, leading (amongst others) to stigmas that, for example, prevent those people from finding jobs[9].
A new highway
The realisation of a new highway does not only generate effects for the direct owners and users of the highway, but could also generate the following secondary effects (depending on the primary impacts):
- An improved functioning of the markets in the local economy as a whole due to a reduction of transport costs.
- An improved functioning of labour markets due to its increased size.
- Scale and agglomeration advances due to an increased size of the market
- Spatial and strategic effects due to an improved reach ability of the area.
A newly developed tourist area
The total impact of the development of a tourist area (with hotels, apartments, bars and clubs, and so on) is not limited to the direct economic impact, but will also lead to jobs, turnover and revenues for other sectors in the economy such as: trade, real estate, the financial sector, hotels and restaurants, transport & communication, manufacturing, and so on. The tourist sector, in turn, will generate business for the trade sector, the financial sector, the real estate sector, agriculture, and so on.
Related subjects
Footnotes and references
- ↑ Source: Government of Ontario, Canada. [1]
- ↑ Source: B. and G. Weisbrod (1997). Measuring economic impacts of projects and programs. Economic Development Research Group.
- ↑ Detotto,C. and E. Otranto (2010). Does crime affect Economic growth? KYKLOS, Vol.63–August 2010-No.3, 330-345.
- ↑ Foreign direct investment (FDI) is a direct investment by a business or enterprise in a foreign economy. The motives of FDI are diverse, for example, to reduce export costs (less transport and export tariffs) or to take advantage of local labour forces and know-how.
- ↑ Tita, G., T. Petras, and R. Greenbaum (2006). Crime and Residential Choice: A Neighbourhood Level Analysis of the Impact of Crime on Housing Prices. Journal of Quantitative Criminology Vol 22, No 4, Pp 299-317.
- ↑ Ihlanfeldt, K., T. Mayock (2009).Crime and Housing Prices. Department of Economics and DeVoe Moore Center, Florida State University
- ↑ Gibbons, S. (2004). The costs of urban property crime. The Economic Journal, 114 (499). ISSN 0013-0133.
- ↑ See: http://www.guardian.co.uk/money/2011/feb/01/police-crime-website-house-prices
- ↑ UNODC and World Bank (2007). Crime, Violence, and Development: Trends, Costs, and Policy Options in the Caribbean. Report No. 37820.
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