Secondary economic impact

Secondary economic impact

Secondary economic impact is the belongs to::economic output change occurring in the economy due to transactions with the sectors that generate the is caused by::primary economic impact and is a frequently used category of belongs to::economic impact. Each time a transaction takes place, there is a measurable economic impact. The people, pubic organisations and businesses who are primarily involved in a specific project, decision, event or policy, will generate further economic effects due to an additional re-spending of income, revenues, time, and tax to the transaction partners.

Definitions of (secundary economic impact)

Secondary (or additional) economic impact comes in different forms and shapes. It includes:

• Secondary economic impact is the effect resulting from subsequent rounds of expenditure (re-expenditures) of different sectors in the economy. These subsequent rounds of expenditure are the result of transactions between the owners/users of the urban object in question and representatives of other sectors in the economy.
• Secondary economic impact can be divided in effects of the first and higher order. The realization of a hotel, for example, will generate transactions between the hotel and the direct suppliers (this is a first order effect). These direct suppliers, in turn, will perform transactions with their suppliers, and so on.
• Induced economic impact results from the re-expenditures of households. Employees of companies and public organizations, for instance, earn wages that are spend on food, clothing, shelter and other consumer goods and services. This leads to further transactions throughout the local economy.
• Dynamic economic impact refers to the consequences of broader shifts over time in population and location patterns, land use and resulting land value patterns due to a shift in the economic balance. Commencing the realization of a major international airport, for example, will lead to broad economic shifts in the location patterns of companies, employees and suppliers that will in the end have consequences for the income and welfare of people in the whole nation.
• 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". The term multiplier is used since the indirect and induced impacts make the overall economic impact substantially larger than the direct impacts alone

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),“crime acts like a tax on the entire economy: it discourages domestic and foreign direct investments. 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) “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), 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. 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. 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.

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.

A scientific institute

The realization of a scientific knowledge institute will generate the following secondary economic impacts:

• More productive research project development
• More productive applied sciences in business
• Economic spin-offs suppliers
• Induced effects employees

Related subjects

• Economic main page

Categories of economic impact:

• Primary economic impact
• Secondary economic impact
• External effects

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:

• Economic output
• Economic tools

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