The Mechanics of the Input-Output Model
Economic multipliers are generated through the use of input-output models. These are statistical models that quantify relationships among industries. They examine the pattern of purchases by industries and the associated distribution of jobs and wages by industry. Input-output models identify, for example, all the industries from which a construction contractor purchases its supplies and in what proportion. In turn, the model then identifies the industries that are suppliers to these suppliers, or “second generation” suppliers. This continues until all major purchases are accounted for contributing to the construction contractor’s original purchases. These original purchases are called the “direct sales.” All other associated sales from within the supply chain are considered “indirect and induced sales.” There are other indirect and induced effects associated with the contractor purchases. These include retail and other expenditures made by the construction workers paid to use the materials purchased by the construction contractor.

The size of these indirect and induced effects depends upon the definition of the region being looked at as well as the nature of the economy within the region. A large region with a closed economy, which means that most needs are being met by industries located within the region, would keep many of the sales, earnings, and jobs impacts within the region. In a region like this, the multiplier effects would be relatively large, with a large share of the effects captured within the region. In contrast, a small region with an open economy, which means an economy with a limited array of producers providing goods and services, would leak sales to other regions. Because many purchases would be made from industries outside the local economy, the multiplier impacts on the local economy would be minimized. » Read more: Economic Impacts Methodology