Economic impact assessments explained
An economic impact assessment (EIA) helps show how a project, investment, or event contributes to employment and economic activity in a region or country.
EIAs are commonly used, which makes it important that non‑economists understand what an EIA is, when it is used, and what its key benefits and limitations are. This article summarises these points based on our extensive expertise in undertaking EIAs for a wide range of clients and projects.
What is an EIA?
An EIA is a robust and well‑established approach used to quantify the economic impact of a programme, investment, or event. It traces and quantifies how money ripples through a national or regional economy. Understanding how these ripples work is key to interpreting EIA results.
The underlying logic of an EIA is straightforward. An initial expenditure (the direct effect) in an industry or enterprise creates successive “waves” of spending that flow through the wider economy. These flows are:
Indirect (upstream) effects: The industry or enterprise receiving the initial expenditure purchases materials and services from suppliers, who then make further purchases from their own suppliers.
Induced (downstream) effects: People employed directly in the affected industry or enterprise, as well as those employed by suppliers, earn income (mostly from wages and salaries, but also from profits). After tax, this income is spent on consumption, with some allowance for savings.
Together, these expenditures create flow‑on effects (indirect and induced). As a result, the total economic output generated by an initial expenditure is larger than the initial direct effect alone.
Key benefits of an EIA
The key benefits of undertaking an EIA for organisations are as follows:
- Clear measurement of the overall economic value: An EIA quantifies economic effects such as job creation (direct, indirect, and induced), gross domestic product (GDP) contribution, and business output. Expressing these effects in monetary and employment terms makes them easier to understand and communicate with stakeholders.
- Better informed decision-making: An EIA provides evidence‑based insights that help decision-makers compare alternative options or scenarios and understand which industries will be affected by the initial direct effect.
- Increased transparency and accountability: Undertaking an EIA prior to investment decisions demonstrates responsible use of funds, provides a documented rationale for decisions, and helps justify investments to stakeholders.
- Improved stakeholder engagement: An EIA helps an organisation to communicate potential benefits to local communities, businesses, funders, and government agencies.
- Support for funding and investment decisions: An EIA can often be required for, or strengthen, an organisation’s case for seeking government grants or approvals, private investment, and public‑private partnerships.
Overall, the core benefit of an EIA is the clarity it provides, as it enables us to transform complex economic interactions into actionable insights that support informed, transparent, and defensible decisions.
Using EIAs responsibly
Like any economic modelling tool, EIAs have limitations that organisations should be aware of. These are the limitations that organisations using an EIA should be aware of:
- Limited treatment of opportunity costs. EIAs typically do not fully account for opportunity costs, such as what alternative investments could achieve with the same resources, how funds could have been used elsewhere, or crowding‑out effects (when public spending displaces private activity).
- Focus on economic activity rather than welfare. An EIA measures the expenditure, employment, and GDP flows, rather than quality‑of‑life outcomes, such as environmental costs, social impacts, and the distribution of benefits across communities.
- Static, point-in-time nature of the assessment. EIAs are often for a single point in time. They do not model long-term structural changes, productivity shifts, or how markets may adjust. Prices do not change, and new demand does not affect existing demand for goods and services.
- Data quality and availability constraints. An EIA relies on the accuracy and granularity of the initial expenditure effect, as well as using historic industry averages when calculating the multipliers that are used in the EIA calculations.
Given these limitations, EIAs should be used thoughtfully. Results should be treated as estimates that indicate scale and direction, not precise predictions. Assumptions used in calculations should be transparent, and for larger or more complex projects, EIAs should be complemented with environmental assessments and social impact analysis.
Taken together, these tools provide a more complete understanding of economic, environmental, and social effects. Understanding both the strengths and limitations of EIAs highlights the importance of experience in applying them effectively.
BERL’s extensive experience
At BERL, we are able to use our extensive experience with EIAs across a wide range of sectors and project types to work with our clients to maximise the benefits of an EIA, while mitigating the limitations of the approach. Publicly available examples of our work include: