Research Reports

Development of Indirect Impact Assessment Methodology and Multipliers
Friday, 05 February, 2021

This report highlights the derivation of sector-specific output (revenue), employment, and investment multipliers based on the Input-Output framework for the Georgian economy, which portrays the potential spillover effects of an increase in final demand for the products of a given sector on the whole economy. The resulting multipliers capture the total impact on the economy consisting of initial, direct, indirect, and induced effects on the economic variables of interest, respectively, as a result of an exogenous shock to one of the components of final demand (e.g. household or government consumption, export).

At the heart of the analysis is the Input-Output Table (IOT), containing information on inter-sectoral dependencies, as well as existing relationships between sectors, final users (e.g. households, government, etc.), and economic production factors. Measured over a specific period (typically one year), an IOT presents inter-sectoral transactions that are generally recorded in monetary terms. Therefore, sectors are connected by the amount they require each other’s production as an input.

The present methodology follows a well-established pattern for the construction of a national Input-Output Table, subsequently used to derive the selected multipliers. The core framework consists of three forms of table, each acting as the basis for the IO analysis: the Supply Table, the Use Table, and the Input-Output Table. Since an independent IOT is not yet available, applying an IO analysis to the Georgian economy requires the Supply and Use Tables (SUT), published by the National Statistics Office of Georgia (Geostat), to be transformed into a Sector-by-Sector Input-Output Table. The IOT will be constructed using the latest available SUTs (2018), with a 21x21 sectoral disaggregation level, following the methodological instructions in the UN Handbook on Supply, Use, and Input-Output Tables (2018). The multipliers for the IOT will thereafter be derived from the reference year of 2018.

This report presents the derivation of both Type I and Type II multipliers to analyze the initial, direct, indirect, and induced effects in terms of revenue, employment, and investment generation for each sector of the Georgian economy. Type I multipliers incorporate initial, direct, and indirect effects, whereas the sum of the initial, direct, indirect, and induced effects is captured by the Type II multipliers (see Chart 1 below).

The derived output multipliers reflect the cumulative revenues of the Georgian economy, as generated per one additional GEL worth of final demand for a given sector’s product. Comparing Type I output multipliers, measured at the sectoral level, it can be inferred that the manufacturing sector (with an output multiplier of 1.60) generates the highest revenues (1.60 GEL per 1 GEL spent); followed by accommodation and food services; and arts, entertainment, and recreation with multiplier values of 1.49 for both sectors. By capturing the induced effects of an initial increase in expenditure for each sector, the Type II multipliers reveal that agriculture; professional, scientific, and technical activities; and education currently have the greatest impacts throughout the economy in terms of revenue, with respective multiplier values of 3.20; 3.03; and 3.01. However, it should be noted that Type II multipliers may significantly overestimate the real effects of initial expenditure due to the rigid consumption behavior of households assumed in the model. Type II multipliers are thus generally considered to be the upper bounds of economic impact. According to Oosterhaven, Peik, and Stedler (1986), a real estimate lies halfway between Type I and Type II multipliers.