Economic Impact Report FY 2001

• Economic Impact Report FY 2001 (PDF: 184K)
  • Methodology

The estimates of economic impact in the Economic Impact Report - FY 2001 were calculated using standard econometric models, detailed in the following methodology from Americans for the Arts. All of the information in the Economic Impact Report has been verified by Commission staff and by the San Diego Regional Arts and Culture Coalition.

Methodology

While some economists support cost-benefit analysis, many econometricians rely upon the input/output analysis for assessing expenditures. Furthermore, the input/output analysis is well-suited for economic analysis at the local level because it is based on research examining the dollar flow of 533 finely detailed San Diego industries. The process relies on the extensive research, professional economic research firms and trained econometricians, and is more expensive; yet it yields current and reliable data. This econometric model used for this report was created for the City of San Diego's arts community in 1992 as part of the national economic impact study, Jobs, The Arts, and The Economy.

The following describes the quantitative research methodology used in this report:

1. Data collected on our local, state, and federal economies is reduced to reflect San Diego's unique size and industry mix; a matrix resulted.
2. Next, the data table is adjusted so that only transactions with local businesses are recorded in the inter-industry part of the table. (This technique compares supply and demand, and estimates the additional imports or exports required to make total supply equal total demand.)
3. The resulting data table shows the detailed sales and purchase patterns of 533 local industries.
4. The table is then aggregated to reflect the general activities of 32 industries plus local households (a total of 33 industries).
5. To trace changes in the economy, each column is converted to show the direct requirements per dollar of gross output for each sector.
6. Data regarding wage, labor, and commerce (i.e. purchase) patterns is also collected from the state and the U.S. Department of Commerce.

The economic impact figures for the study were computed using what is called "iterative" procedure. This process uses the sum of an infinite series to approximate the solution to the economic model. This is what the process looks like in matrix algebra: T = IX + AX + A.X + A^aX + ...+ AnX. T is the solution, a column vector of changes in each industry's outputs caused by the changes represented in the column vector X. A is the 33 by 33 direct-requirements matrix. This equation is used to trace the direct expenditures attributable to nonprofit arts organizations. A multiplier effort table is produced that displays the results of this equation.

A multiplier is an estimate of the number of times a dollar changes hands within the community (e.g., the theater pays the actor, the actor spends money at the grocery store, the grocery store pays the cashier, and so on). It is quantified as one number by which expenditures are multiplied. For example, if the arts are an industry with $10,000,000 in expenditures, and a multiplier of three is used, then the arts would have an economic impact of $30,000,000. Its convenience is that it is one simple number. (A separate study of attendees at arts events is required to determine audience spending and its economic impact.) However, users rarely note that the multiplier is developed by making gross estimates of the industries within the local economy and it does not allow for differences in the characteristics of those industries. Within the context of a full input/output analysis, the multiplier does not contribute to gross overestimation.

The resulting total column (column 13) is T. The initial expenditure to be traced is IX (I is the identity matrix, which is operationally equivalent to the number 1 in ordinary algebra). Round 1 is AX, the result of multiplying the matrix A by the vector X (the outputs required of each supplier to produce the goods and services purchased in the initial change under study). Round 2 is A.X, which is the result of multiplying the matrix A by Round 1 (it answers the same question applied to Round 1: what are the outputs required of each supplier to produce the goods and services purchased in Round 1 of this chain of events?). Each of columns 1 through 12 in the multiplier effects table represents one of the elements in the continuing but diminishing chain of expenditures on the right side of the equation.

Calculation of the total impact of the nonprofit arts on the outputs of other industries (T) can now be converted to impacts on final income to the owners of resources by multiplying the outputs produced by ratios of arts income and employment to output. Thus, column 14 is an estimate of the employment impact of changes in outputs due to arts expenditures, and is calculated by multiplying elements in column 13 (T) by the ratio of employment to output for the 32 industries in the region (recorded in column 20). Columns 15 through 17 convert the changes in outputs due to arts expenditures to changes in household incomes, local government revenues, and state government revenues in the same way. Columns 22 through 24 are calculations of the direct impact on incomes and revenues associated with the direct impact vector (X) and are also calculated similarly.

In addition to the method described above, this report employed Qualitative Research Methodology. In FY 2001, 90 organizations of the Organizational Support Program of the Commission were asked for: (1) Data on any awards or other recognition from civic, professional, or government agencies. (2) Any anecdotal material derived from letters of support, etc. in praise of their programs; and (3) Any new works, world premiere productions, museum exhibitions, etc., and if these works have been presented elsewhere. Given the abundant feedback we received, we can surmise that arts organizations seek to enhance the positions of the arts in the public's eye.