Appendix A - Economic Impact Assessment.pdf

                                            Noosa Springs Luxury Hotel Economic Impact Assessment
                                                                                      Final Report

Appendix B: Input-Output Modelling Limitations
Input-output (IO) modelling is a common technique for economic impact assessment and has been
used for a range of purposes, including to inform strategic or government policy decision making.
However, IO modelling has certain limitations and weaknesses, including:
    •   Lack of supply-side constraints: IO multipliers assume that extra output can be produced in
        one area of activity without taking away resources from other activities. Actual impacts
        would be dependent on the availability of appropriate labour and capital and other
        productive inputs.
    •   Fixed prices: IO systems assume fixed prices, so that the effects of relative price changes
        play no role in the allocation of scarce resources between activities. Essentially, prices are
        fixed and do not change relative to changes in supply and demand. Actual impacts would be
        affected by relative price changes due to constraints on the availability of labour, capital and
        other inputs and policy changes as well as changes in demand.
    •   Fixed ratios for intermediate inputs to production and outputs from production: IO
        modelling uses fixed input structures for each industry so that changes in production
        technology and the use of inputs in production play no role in impact assessment. Actual
        impacts could be affected by changes in production technologies including in the use of
        domestic and imported inputs and the mix of outputs including in the supply of products to
        household, investment and export demands.
    •   No allowance for household purchasers’ marginal responses to change: IO modelling
        assumes that consumption is fixed to initial budget shares, so that real budget shares remain
        unchanged with changes in household income and relative prices. In practice, the level and
        composition of household purchases would be affected by income and relative price
        changes.
    •   Absence of budget constraints: IO modelling assumes that consumption is unconstrained so
        that changes in household or government consumption occur without reducing demand
        elsewhere. In practice, the level of consumption expenditure by households and government
        would be budget constrained.
Despite its flaws, IO modelling has proven an effective tool in understanding the economic benefits
of a specific project, strategy or policy.




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