Teaching/Communication/Extension/Profession,

Nelson, James R.

English

Research Papers in Economics

SOUTHERN JOURNAL OF AGRICULTURAL  ECONOMICS  JULY, 1978
AN AREA  ECONOMIC  DEVELOPMENT  IMPACT
MODEL  FOR  EXTENSION  APPLICATION
James R. Nelson
Most  area  economic  development  impact  The  application  of  interindustry  models
models are based on the premise that the basis  often requires large amounts of data, computer
of an  area  economy  is  a  group of  local  firms  hardware,  and  at least  some  familiarity  with
which produce goods and services for sale out-  computer  programming  techniques.
side the area.  Agriculture,  mining, and manu-  Computing  equipment  and  programming  ex-
facturing firms typically make up a large part  pertise  are  usually  available,  for  a  price,  to
of  such  a  group  of  exporting  or  basic  firms.  rural  development decisionmakers,  who there-
However,  in most communities  and some larg-  fore  should  not  necessarily  avoid  complex
er areas, many service firms (wholesale, retail,  models.  If the capabilities  of  such models  fit
transportation,  finance,  medical,  utilities)  sell  the needs of decisionmakers  in particular situa-
some  of  their  products  outside  the  local  tions, and if data collection and computer costs
economy.  These exports  are part of the area's  are not prohibitive, these types of models can
economic  base.  That portion  of the output  of  be very useful.
the firms in an area which goes to satisfy local  However,  such complexity is not inherent in
demands is nonbasic output. Area employment  all  interindustry  models.  Economic  base
used to produce basic and nonbasic goods and  models (a type of interindustry  model) can be
services can be classified similarly as basic and  structured  to  provide  information  on  many
nonbasic employment, respectively.  area  development  questions  by  theoretically
These  relationships  can be  modeled  mathe-  sound  but  relatively  uncomplicated  tech-
matically  for  an area  economy  (interindustry  niques. Readily available data on employment,
models) to yield estimates  of the proportion of  population,  income, and local tax structures in
the area's  nonbasic  economic  activity  attrib-  an area can be coupled with simple estimates of
utable  to  local  basic  industries  [2,  3,  5,  10].  the nature  of the area's economic  base to an-
Such  estimates  usually  are  stated  as  multi-  swer many questions  about  the effects of  de-
pliers.  Multipliers  can be used to indicate  the  velopment on the area and its residents. Such a
relationship  between an observed change in an  model is presented and demonstrated.  It  is de-
economy and the amount of economic activity  signed  for use  by community  decisionmakers
that  this  change  creates  throughout  the  and rural development  field practitioners.  The
economy.  model  facilitates  the  estimation  of  employ-
Typically  the  multipliers  calculated  with  ment,  population,  income,  and  tax  impacts
such models relate to employment and income,  from new jobs in a rural community.
An employment multiplier indicates how total
employment  in an economy will  be affected  if
employment  is  increased  or  decreased  in  a  A  SIMPLIFIED  MODEL
particular  industry.  Similarly,  an  income  FOR  FIELD USE
multiplier measures the total change in income
in an economy that is created by a change in a  A  simplified model  in which  economic base
particular industry.  and location quotient theories are used to esti-
Such economic  models have  been developed  mate such impacts involves estimating expect-
for many  areas in many states  [10].  They can  ed  change  in  an  area's  total  employment  re-
be  based  on primary  data or  can  be  synthe-  suiting from a change  in the area's basic  em-
sized from state or national models  [1,  4].  ployment. This information then can be used to
James R. Nelson  is Assistant Professor. Department  of Agricultural Economics,  Oklahoma State University.
89estimate expected  changes  in area  population  manufacturing employment  is basic,  and thus
and income and expected impacts on the area's  the division of employment between basic and
tax  base.  Employment  changes  can  be  esti-  nonbasic applies only to other types of firms.
mated as follows.
Employment changes relate directly to popu-
ANB  = N  X AE if AE  - (NEi X AE)  lation and  income.  If  full  employment  in  an
ANB  N  X  E  if AE  N  E  )  area is assumed, population  changes resulting
from a change in the area's employment can be
1 °  estimated as:
ANBi =  AE, if AE i- (  X AE) < 0  PMULT =  (APOP-NW)/AE
A  APOP = AAE  X PMULT
ABi = AE i - ANB,
AB =  i  AB  where
ESNW =  (N  p  X (AE - AB)  AAPOP = change in area population and
PMULT = change  in  area  population  per
new area job.
AMULT  - (AE - ESNW) AMULTB
AB  Change  in area  income  (AAI)  from  new  em-
AAE = AAB  X AMULT  ployment  and population  can be estimated by
multiplying  the  change  in  area  population
where  (AAPOP) by per capita income (PCI). Or, if the
expected  wages  of  new  basic  employees  are
ANBi = area nonbasic employment  in in-  known, a more precise estimate can be made by
dustry type i  considering  these  expected  earnings  in  new
NE = total national employment  basic employment separately:
NE. = national employment in industry
type i  APNB  =  (AAE -AAB)  X PMULT
AE  = total area employment
AE  = area  employment  in  industry  AAI = AAIB  +  (APNB X PCI)
type i
AAE = change in total area employment  where
resulting from  a change  in area
basic employment  APNB  = change in area population result-
AB = total area basic employment  ing from  new  nonbasic  employ-
AB, = area basic employment  in indus-  ment
try type i  AAI  = change in  area income  resulting
AAB  = change in area basic employment  from a change  in area  basic  em-
NW = area population  neither working  ployment and
in nor supported  by workers  in  AAIB  = change in area basic income.
the local labor force
ESNW = local  employment  serving  area  Expected  new  local  tax  revenue  resulting
persons  neither  working  in  nor  from increased population can be estimated by
supported by workers in the local  multiplying  the new  population  by per capita
labor force  county  and  municipal  taxes  collected  in  the
APOP = area population  area. This  information  can be estimated more
AMULT = change in total area employment  precisely  for  a  particular  area  if local  taxing
per new area basic job and  mechanisms are well understood. For example,
n = number  of industry  types in the  if a new plant bringing new basic employment
area.  is expected in an area where local tax bases are
sales and property taxes,  new sales tax collec-
It  is assumed that, for a particular industry  tions  can be  estimated  on  a  per capita  basis
type in an area, the proportion of its employ-  and new property taxes can be estimated as:
ment attributable  to local demand for its out-
put (nonbasic employment)  will not exceed the  AIT = VP X EITR
proportion  of  total  national  employment  ac-
counted  for  by  that  industry  type  [11].  For  ART = AAPOP  X PCRT
rural communities  a more reasonable  assump-
tion may be that all agricultural,  mining,  and  ACT = AAPOP X  PCCT
90where  ing county population  not supported  by local
employment  from total population  and divid-
AIT =  new tax on industrial property  ing the result by county employment.  For the
ART =  new tax on residential property  example county,  locally supported  population
ACT =  new tax on commercial property  per job was  estimated to be 2.0;  therefore  new
VP =  value of new plant  population  resulting  from  100  new basic jobs
EITR  =  effective  tax  rate  on  industrial  and  the resulting  110  new  nonbasic jobs was
property  estimated to be 420.  Expected county income,
PCRT = per capita local residential prop-  county  taxes,  and  city  taxes  resulting  from
erty tax and  such increases  in employment and population
PCCT =  per capita local commercial prop-  were  estimated  from  available  data  on  per
erty tax.  capita income and taxes.
AN  EXAMPLE  APPLICATION
AN  EXAMPLE  APPLICATION  FIGURE 1.  ESTIMATION  OF  A BASIC  EM-
OF  THE  ~MODEL  PLOYMENT  MULTIPLIER FOR
PAYNE COUNTY, OKLAHOMA In  Table  1  example  estimates  of  basicPAYNE  COUNTY, OKLAHOMA
employment  by industry types are shown for a  Area  population  neither county in Oklahoma.  From these estimates,  a  Local  employment  working  nor  supported  by
,asic  A  ployment  multiplier  is  calculaserving  persons  not  workers in  the  local basic  employment  multiplier  i  calculated  supported  in  local  labor  force  Area  non-basic
(Figure 1), and new county population, income,  laor force  Area  opulation  employment
and  local  taxes  which  would  result  from  100  10879a
new basic jobs are estimated  (Figure 2).  Virtu-  50654  11,621  =  2,495
ally  all  of the data  for these  calculations  are
available  from  readily  accessible  secondary
Local  employment sources.  In  the  example,  all agriculture,  min-  serving  persons  not
Rasic  Total  supported  in  local ing,  and  manufacturing  employment  in  the  Employment  Employment  - labor  force  19,8C5  - 2,496 
county was assumed to be basic. Basic employ-  ultiplier  Basic  employment  8,184
ment in other industries was estimated as dis-
cussed  heretofore.  A  county  employment  aInmates  of  institutions,  persons  in  group  quarters  (primarily  college dormitories  and military  barracks)  and persons  65 and over  who are  not  in multiplier  of  2.1  was  estimated  (Figure  1).  the  labor  force  (from  [13]).
Thus,  every  new  basic  job  created  in  the  bFrom  [13].
economy  would  be  expected,  over  the  long
term, to result in 1.1 new nonbasic jobs.
Some of the impacts which could be expected
from 100 new basic jobs in the example county  FIGURE 2.  ESTIMATION  OF  NEW  POPU-
are estimated  in Figure  2.  Locally  supported  LATION, INCOME,  AND LOCAL
population per job was calculated by subtract-  T  AXE  S  (196 DOLLARS)  FROM
100 NEW BASIC JOBS-PAYNE
TABLE  1.  ESTIMATION  OF  BASIC  EM-  COUNTY, OKLAHOMA
PLOYMENT  FOR PAYNE  COUN-
TY, OKLAHOMA  Total  new county  employment  = 100  x  2.1  = 210
Total  new  county  population:
U.S. Employment  - 1970  Payne  County  Employment  - 1970  1970 county  population  =  50,654
(1)  (2)  (3)  (4)  (5)  1970  county  population  not  supported  by  local Number  of  Percentage  Number  of b Estimated  Estimated  employment  = 10,879 Employees  of  Total  Employees  Non-Basi c Basic 
_________  ""___(thousands)  Employment  Employment  1970  county  population  supported  by  local
Agriculture  3,566  4.5  1,087  0  1,087  employment  = 39,775
Mining  515  0.7  ~485  0  485  P1970  county  employment  = 19,805 Mining  515  0.7  485  0  485
Locally  supported  population  per  job  =  2.0
Manufacturing  20,737  26.4  1,606  0  1,606
Total  new population  210  x  2.0  = 420
Construction  4,814  6.1  1,002  1,002  0
munication  and inunication and  Total  new  annual  county  income  = annual  county  per  capita  income  x  new
Utilities  5,317  6.8  832  832  0  population =
Wholesale  and Retail  $4764
a
x  420  =  $2,000,880 Trade  14,996  19.1  3,624  3,624  0
Finance,  Insurance,
FReal  Estate ancd  Total  new annual  county  taxes  = annual  county  taxes  per  capita  x new
Business  and Repair  population  =
Services  6,325  8.0  1,005  1,005  0
$123b  x 420 = $51,660 Personal, Entertain-  $123  420  51,660
ment  and Recreation
Services  4,990  6.3  1,181  1,181  0
Total  new  annual  city  taxes  = annual  city  taxes per capita  x new Professional  and  population Related  Services  12,894  16.4  8,254  3,248  5,006
Public Administration  4,473  5.7  729  729  0  $56
c
x  420  = $23,520
Total  78,627  100.0  19,805  11,621  8,184
aFrom  [12].
bFrom  [13].  a1970  data  [13]  adjusted  to  1976  by the consumer  price  index.
CAssumed  to  equal zero for  Agriculture,  Mining and  Manufacturing.  For other  sectors this
was  calculated  as the lesser of  the value  in column  3 or  the value in column  2 times the  bCalculated  from  data  in  [6,  7,  9]. total  of  column  3.
dCalculated  as column  3 minus column  4.  CCalculated  from  data  in  [8,  9].
91IMPLICATIONS  gest opportunities for the development of more
nonbasic economic activity.
Estimates  of  income  and  employment  The model presented is one that can be used
impacts of development in an area or communi-  by field extension personnel or interested com-
ty can be very useful to local businessmen  as  munity  leaders  to  evaluate  the  potential
they evaluate the effects of such development  impacts of economic development on a particu-
on their businesses  and thus on their own eco-  lar area or community.  Economic base  and lo-
nomic wellbeing.  Estimates  of the impacts  of  cation quotient theories are used in the model
development  on  local  tax  revenues  are  to  estimate  basic  employment  and  nonbasic
important  to  local  government  officials  and  employment  for  an area,  and to estimate  the
others  concerned with the provision  of public  expected change in total employment resulting
services. Such persons must weigh the value of  from a change in basic employment.  Once such
expected new tax revenues against the costs of  economic base information has been estimated,
expanding local public services to serve the in-  it can be coupled  in the model  with available
creased  population.  They  must consider care-  data  on  population,  income,  and  local  tax
fully not only operating costs for such services  structures to answer many questions about the
but also any new capital costs which might be  effects of development on the area and its resi-
necessary  to expand public service  systems to  dents.
accommodate local growth.  This simplified model  cannot be viewed as  a
Aside  from being  useful for  calculating  im-  comprehensive  planning  model  for  area  de-
pacts of development  on local economies,  esti-  velopment.  Its input and output relate to only
mates  of  local  multipliers  can be  of value  to  a few  variable.  However,  these variables  (em-
persons  involved  with  development  planning  ployment,  income,  population,  and tax  bases)
as indicators  of the degree  of development  of  are key elements in area development.
local  economies.  The  employment  multiplier  The  results  obtained  by  using  this  model
for Payne County, Oklahoma,  estimated to be  should  be helpful  to  local  decisionmakers  in-
2.1  in  the example,  is  rather  large  for  small  cluding  businessmen,  economic  development
local  Oklahoma  economies  (rural  towns  and  planners,  industrial  developers,  and local gov-
counties). This estimate is indicative of a well  ernment  officials.  The  model  can  be  applied
developed  area  with  a  rather  complete  set  of  legitmately  to any  geographic  area  for which
nonbasic  firms  for  a  small  local  economy.  A  data are  available.  Because  of  its  simplicity,
much lower employment multiplier  for a local  the model is particularly applicable at the mu-
economy of similar size (population) would sug-  nicipality and county levels.
REFERENCES
[1]  Boisvert,  Richard  N.  and  Nelson  L.  Bills.  "A  Non-Survey  Technique  for  Regional  I-O
Models,"  Department  of Agricultural  Economics,  Cornell University,  A.  E.  Res.  76-19,
1976.
[2]  Doeksen,  et al. "Multipliers of Agriculture  and Other Industries,"  Oklahoma  State Univer-
sity Extension Facts No. 820, 1975.
13]  Doeksen, Gerald A. and Dean F. Schreiner.  "Interindustry Models for Rural Development Re-
search," Technical Bulletin T-139, Agricultural Experiment Station, Oklahoma  State Uni-
versity, 1974.
[4]  Mustofa, G. and L. L. Jones. "Regional  Input-Output Model Using Location Quotients,"  De-
partment of Agricultural Economics and Rural Sociology, Texas A & M University, Report
No. 71-4, 1971.
[5]  Nelson, James. "Impacts of Agriculture on Oklahoma's Economy,"  Oklahoma  State Univer-
sity Extension Facts No. 826, 1977.
[6]  Oklahoma State Department of Education. "1975-76  Annual Report," Oklahoma City: Allied
Printers and Publishers, Inc., 1976.
[7]  Oklahoma Tax Commission. "State Payments to Local Governments,  1976," Oklahoma City:
State of Oklahoma, 1976.
[8]  Oklahoma  Tax Commission.  "State  and Municipal  Sales  and Use Taxes,  1976,"  Oklahoma
City:  State of Oklahoma, 1976.
[9]  Payne County Assessor's Office. Unpublished data on 1976 Payne County property valuation
and tax levies, Stillwater,  Payne County, Oklahoma,  1976.
[10]  Schreiner,  Dean F. and James C. Chang. "Projection and Analysis  of the Economies of Sub-
state Planning Districts in Oklahoma,"  Ozarks Regional Commission and Oklahoma  State
University, 1974.
92[11]  Tiebout,  Charles M.  The Community Econdmic Base Study, NewYork:  Committee  for Eco-
nomic Development,  1962.
[12]  U.S. Department of Commerce Bureau of Census. Statistical  Abstract of the United States -
1971, Washington, D.C.:  U.S. Government Printing Office, 1971.
[13]  U.S. Department of Commerce,  Bureau of Census. 1970 Census of Population, General Social
and Economic Characteristics  - Oklahoma, Washington, D.C.:  U.S. Government  Printing
Office,  1972.
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A Non-Survey Technique for Regional I-O Models,&quot;

Assessor's Office. Unpublished data on 1976 Payne County property valuation and tax levies,

Commission. &quot;State and Municipal Sales and Use Taxes,

Commission. &quot;State Payments to Local Governments,

Department of Education. &quot;1975-76 Annual Report,&quot; Oklahoma City: Allied Printers and

Government Printing Office,

Impacts of Agriculture on Oklahoma's Economy,&quot; Oklahoma State University Extension Facts No.

Multipliers of Agriculture and Other Industries,&quot; Oklahoma State University Extension Facts No.

Projection and Analysis of the Economies of Substate Planning Districts in Oklahoma,&quot; Ozarks Regional Commission and

Regional Input-Output Model Using Location Quotients,&quot;

AN AREA ECONOMIC DEVELOPMENT IMPACT MODEL FOR EXTENSION APPLICATION

AN AREA ECONOMIC DEVELOPMENT IMPACT MODEL FOR EXTENSION APPLICATION

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Research Papers in Economics