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ECONOMIC IMPACT MODEL OF MIAMI BEACH'S
ECONOMY WITH SPECIAL REFERENCE TO THE
ARTS, ENTERTAINMENT AND TOURISM
PRELThfiNARY PROPOSAL PREPARED FOR THE
CIlY OF MIAMI BEACH
Maria J. WilIumsen
Florida International University
Department of Economics
Abril 1997
ECONOMIC IMPACT MODEL OF MIAMI BEACH'S
ECONOMY WITH SPECIALfREFERENCE TO THE
ARTS, ENTERTAINMENT AND TOURISM
~
",
Abstract
The purpose of this research is to construct an input-output model for the City of Miami Beach that
can be used for making planning and economic impact assessment decisions related to alternative
policies regarding growth and potential changes in the area's economy. The model will be designed
to express the city's production structure and the interrelatedness of these sectors. Specific reference
will be made to Miami Beach's main productive sectors (Arts, Entertainment, and Tourism) in order
to highlight the interrelationships among these sectors as well as the relationships between these
sectors and other sectors of the local economy. With these features, the model can be used to
evaluate the impacts of additional expenditures on Arts, Entertainment and Tourism (as well as of any
other sector in which be city may be interested) on major macroeconomic indicators such as local
employment, income, government revenues and output level (sectoral and total).
Importance of the study
Arts, tourism and recreation development are certainly not a new form of economic activity in Miami
Beach. They have historically been key sectors of the local economy.
By most criteria the arts comprise a significant area of economic activity. In 1990, American
consumers spent more than $5 billion on admissions to theater, opera, galleries, museums and other
nonprofit arts events, $4.1 billion on movie admissions, and $17.6 billion on books. Because of
difficulties in defining boundaries around the arts industry, statistics on its contribution to GDP are
problematical, but available data suggest that the arts (theater, music, opera, dance, visual arts, crafts,
literature, community and folk arts) account for a little under one percent of the United States GDP,
and a little over one percent of the civilian labor force. Defining the arts more broadly, incorporating
industries such as radio and television as well as printing and publishing, an aggregate value of output
of about $130 billion or 2.5 percent ofDGP (National Endowment for the Arts, 1992) can be found
forl988.
Support for the arts and culture in the U.S. through government and voluntary contributions amounts
to a significant annual commitment of funds. Combined federal, state, and local government
expenditure on the arts and museums in 1988 amounted to almost $1 billion, and in 1990, 6.4 percent
of charitable giving was channeled to arts, culture, and the humanities, yielding a total level of
voluntary contributions in these areas of almost $8 billion in that year. Private markets in the arts are
are also of significant size. Looking at the international art trade, for instance, we can note that the
worldwide net sales of the two major art auction houses amounted to $6.6 billion in 1989-90.
Despite itsimportance and the fact that production and consumption of art have been elements of
human activity for longer than most of the phen5mena that have absorbed the attention of
economists, it is only relatively recently that serious work has begun to be undertaken in the area that
has come to be known as "cultural economics." Lkewise, federal, state and local governments only
recently begun to realize the importance of the arts in their communities.
In the case of tourism the situation is quite distinct. Developing tourism and tourism related industries
has been one of the main goals of many regions/countries for quite a long time. Tourism is considered
as an important source of output growth, government revenues, household income and employment
generation. The importance of this sector certainly should not be underestimated. According to the
World Tourism Organization (1988 and 1990), more than 500 million international tourists spend
about US$220 billion a year, making international tourism one of the fastest growing industries in the
world. Currently, tourism is the world's third largest export sector, after the oil and automobile
industries. In the United States tourism accounts for a third of total US service exports to the world,
with Florida being one of the country's main tourist destination. Within Florida, Miami is a main
tourist location. Over 9 million visitors came to Miami in 1995 for an overnight stay (a 9 percent
increase over the previous year), and a third of these visitors stayed in Miami Beach.
The growth and change observed in these industries is an interdependent process. In fact, these
sectors cannot grow without influencing and being influenced by the rest of the economy. An analysis
of the expenditures of overnight visitors in Miami Beach, for instance, indicates that their main
expenditures fall into the categories of meals, lodging, shopping, entertainment and transportation.
As Miami Beach continues to grow, it will be important to gain a better understanding of the impacts
of this new growth and the shifts in the structure of the local economy.
Those concerned with arts, entertainment and tourism development are often interested in evaluating
the direct and indirect impacts resulting from growth and from certain development policies. Decision
makers are frequently called upon to evaluate the implications of policies or to compare the cost and
benefits of alternative proposed development strategies. Although data are available on these
activities, these data are not usually integrated to show the relationship between these activities and
the overall economy.
There are several economic analysis methods available for planning and impact assessment that can
provide insights into what makes the economy of a region grow and what to expect in the future
from change. Only one method, however, can provide the decision makers with an overall view of
the economy and a detailed information on how the economy works. This method is the input-output
(10) analysis, a methodology that has been largely utilized worldwide to study the impacts of changes
in final demand on the economy as a whole. A main advantage of this model for policy analysis is that
the very nature of the input-output analysis makes the technique "policy-neutral." Each sector is
treated in a uniform manner and the only value judgements that are encountered at the framework
concerns the aggregation specification.
The input-output model
Input-output (10) analysis deals with the empirical study of the interdependence among the various
:sectors of an economy. It shows the uses of the output from each industry or sector as an input to
other industries/sectors in the economy. The basic obje-..'live of 10 models is to trace or describe how
an industry's product is distributed throughout an economy. In an input-output analysis, the economy
is divided into individual producing, consuming and extra-re,gional trade sectors, which represent all
establishments in the region engaged in that activity. The interdependence among sectors is
represented by a set of linear equations whose coefficients (au) reflect the structural characteristics
of the regional economy (See Figure 1 in the Appendix, where a simple economy, with only 6 sectors,
is portrayed). These coefficients, which should be read across the columns in Figure 1, express the
production function of each sector. They are obtained by dividing each cell by the total of that
column. Accordingly, each column represents the purchases of a sector from another sector indicated
in the row, each cell representing the share of that sector in total purchases of the sector. Reading
down column 1, for instance, one would find what sector 1 buys from every other sector (including
imports Ml) to produce its final output Xl' It also shows how much salary it uses (Sl)' and how
much profits (P 1) and taxes (Xl) it generates.
In matrix notation, the model can be represented by
X=AX=Y
(1)
The solution of the set of equations yields a matrix, each element of which indicates the direct,
indirect, and induced changes in the output of industry i (1=6 in Figure 1) as a result ofa change in
the final demand for industry j (also j=6 in Figure 1 ~
The solution of the basic model can be expressed as
X = (I - A)-l Y
(2)
where A = an n x n matrix of technical coefficients (~) In Figure 1 n=6 so the matrix is a 6x6 matrix.
I = an n x n identity matrix (a matrix with 1 s in the main diagonal)
Y = a vector of final demand (in Figure 1 final demand is composed of 4 sectors)
X= a vector of total output necessary to support the final demand Y
The expression (I - Ayl is also known as the matrix multiplier (M). The literature refers to this
matrix as "multiplier matrix" because it shows the results observed in the model expressed in a matrix
form. These multipliers express the direct, indirect and induced effects of a change in final demand.
Since the model is static (because the coefficients are assumed to be constant), the model's use is
consistent with short and mid-term analysis. This model can be transformed into a dynamic model,
but this transformation would entail an enormous effort (in time and monetary terms), and could be
a goal for future time.
The model proposed for the study
The model proposed in this study is a closed, static input-output model, similar to the one presented
in Figure 1 (Appendix). The difference in this case is that the household sector, expressed in Figure
1 as part of the final demand, is incoFporated into the production sector as an additional producing
industry. In this case, households produce labor, thatis used in the production of other goods, and
consume goods and services, which are produced by the other sectors. This means that households
become part of the industrial system, and their 5pending levels are linked to other industries. The
interpretation of the sector's technical coefficients (3;) is similar to the interpretation of other
technical coefficients. Reading down the column one can see how much households buy from other
sectors and from themselves. By the same token, the other sectors now buy labor from households
as they would do in an "open model", but now all these expenditures are endogenous to the model.
The implication of this endogeneity is that as production increases, household income increases and
consumer spending increases, inducing still more production. Therefore, the multipliers obtained with
the "closed model" are more complete than the ones obtained with the "open model" (in which
households are not endogenous to the model and are included in the final demand sector -
exogenous to the system) because it includes the induced impacts captured through the consumption
of households, now endogenous to the model. ,
The Miami Beach input-output model will be developed using a hybrid nonsurvey/survey based
technique. The first step in the model construction will deal with the adjustment of the national input-
output table through a nonsurvey method. This nonsurvey method is based on the United States
Department of Commerce's input-output tables of the U.S. economy, which is modified to reflect the
regional economic structure of Miami Beach. The national direct input coefficients are adjusted to
fit the region, using secondary data sources. The use of the national direct requirements table to
represent Miami Beach's production patterns is based on several assumptions. First, it is assumed that
the production technology and consumption patterns in the region are the same as the national
average. Second, it is assumed that productive inputs not available within the region are imported
from outside the region. Finally, cross-hauling between regions is not allowed.
The nonsurvey procedure used to estimate the Miami Beach input-output model is based on the
location quotient technique. This technique compares the relative importance of sectoral output and
employment in the regional economy to its relative importance in the national economy. When the
local economy is more important than the national economy, its technical coefficients are adjusted
upwards according to the location quotient to reflect this importance. A similar downward adjustment
is made when the economy is less important than the national economy. With these adjustments the
local nonsurvey model is completed.
The second step of the model construction entails a survey method to obtain the technical coefficients
for sectorsfmdustries considered of vital importance for the local economy. Eight sectors are included
in this category: film production, hotel and lodging, eating and drinking establishments, construction,
water transport, retail trade, real estate, and amusement. The coefficients obtained with the survey
technique will be crafted into the local nonsurvey model to replace the adjusted national coefficients
in order to better reflect the reality of the local economy. This hybrid technique is largely used to
improve the quality of the model without incurring into enormous expenses. With this methodology
a more acurate model can be obtained in which only the important sectors are surveyed.
For this research we will utilize the most recent Use and Make tables of the national economy to
derive the Miami Beach's model. This year was chosen to be the base year for the model because it
is the most recent year for which the necessary secondary data (e.g."census reports) is available. The
1992 national input-output technical coefficients wili be updated to 1995 prices.
The Miami Beach input-output model will be compused of ~out 20 endogenous or producing sectors
(including households), chosen to represent the major industrial sectors of the local economy. These
sectors will be selected to confonn with the sectoring scheme used in the national model. The choice
and aggregation of sectors is based on several criteria. The first criterion is to group industries
engaged in similar activities and producing related products, such as aggregating all lumber and wood
product industries into one sector. The second criterion was the relative importance of the industry
in terms of employment, output, and payroll. Sectors of little importance to the local economy will
be lumped together, while important sectors will be kept separate to enable analysts to better
understand their relationships with the rest of the economy.
Nine of these sectors were selected specifically to represent the aI1s, tourism ~nd recreation activities.
These include film production, hotel and lodging, eating and drinking establishments, construction,
water transport, retail trade, real estate, and amusement. The construction and real estate sectors
were chosen to represent the growing residential and commercial development industries along the
coast. The water transport sector includes marinas, boatyards, and charter fishing. The hotel and
loading, eating and drinking establishment and amusement sectors represent the tourism industry and
are primarily service sectors. The movie and arts industries were chosen to represent these important
and growing sectors of the local economy. The amusement sector includes all other entertainment
activities such as sports, etc. The remaining sectors in the model provide a representation of other
industries (agriculture, manufacture and service) within the region. Three exogenous sectors represent
final demand, including investment, government expenditures and exports. This classification will be
further discussed with the contracting agency, during the model construction phase, to best fit the
customer's needs.
Analysis of Input-Output Multipliers
The Miami Beach's model will allow for the estimation of output, income, employment, pollution,
and government revenue multipliers.
Output multipliers measure the total change in output throughout all industries created by an
additional dollar offinal demand in anyone industry. The impact on each industry is differentiated,
and can be obtained for changes in final demand for any industry. The summation of all impacts on
individual industries is the total output multiplier. Since output multiplier includes both industrial and
final demand, they indicate linkage effects of each industry. The higher multiplier, the higher the
industry's linkage with other industries. A multiplier of 1.58, for instance, indicates that a change of
$1 in final demand for a sector will result in a change in output of all sectors that amounts to$1. 5 8.
Income multipliers: those are probably the multipliers most used in economic studies. Unfortunately,
they are also the most misused ones. Most errors occur with the interpretation of these multipliers.
Since there are several ways to calculate income multipliers, economic analysts quite often
misinterpret them. Two types of income multipliers will be obtained in this study. The first one, also
known as "income effect multiplier" is obtained throigh the multiplication of the output multiplier
by the income coefficient (average propensity to use labor) and the division of this product by 1, In
this case it is assumed that the initial injection takes plac~ in the final demand, whose impact is
translated into higher output. Unlike output multipliers they do not "blow up"or multiply one (initial)
estimate of output to another (larger) estimate of output. Rather they translate an initial $1 output
estimate (which comes from an initial $1 final-demand change) into an expanded (direct plus indirect
and induced) estimate of the value of resulting household income. This multiplier can be estimated
for each sector as well as for the economy as a whole.
Type II income multipliers are different from the previous ones in the sense that the initial injection
is assumed not to be the final-demand change but rather the coefficient of income generation (average
propensity to use labor). These multipliers show by how much the initial income effects are blown
up, or multiplied, when direct, indirect, and induced effects. (due to ho.usehold spending because of
increased household income) are taken into account, via the Leontief inverse of A, in which
households are an endogenous sector. These multipliers are obtained through the multiplication of
the output multiplier by the labor coefficient (average propensity to use labor) and the division of this
product by the corresponding labor coefficient. Therefore, these multipleirs are much higher than
output and income effect multipliers, since the product is divided by a number smaller than one.
These multipliers may also be obtained for each sector of the city's economy as well as for the
economy as a whole.
Employment multipliers show the change in citywide employment that occurs throughout the
economy per unit employment change in anyone industry. It is obtained by the multiplication of the
output multipliers by the employment coefficient, in this case measured in physical units. The
multiplier then shows the impact of a $1 change in final demand on the number of jobs. These
multipliers are quite low compared to the previous ones, as they represent jobs not monetary units.
This measure is also used when the number of employees in a new industry is available. In this case
it is possible to estimate the impact of hiring new employees in one sector (say hotel and lodging)
on other sectors interdependent with that sector, by estimating the total expected increase in new
jobs citywide.
Pollution multipliers show the impact of a $1 change in final demand on the pollution level. These
multipliers are derived through the multiplication of output multipliers by a vector of pollution
coefficients. These pollution coefficients are obtained for each sector of the economy and the
economy as a whole.
Government Revenue Multipliers show the effect of a change in final demand of $1 on government
revenues from all sources. They are obtained through the multiplication of the output multipliers by
the average propensity of each sector to generate government revenues (taxes, fees, etc. all lumped
together).
The above multipliers also allow for a comparison of the impacts of growth in various sectors. For
instance, if two sectors have output multipliers of 1.58 and 2.45, increases in sales from the first
sector will generate less of a citywide impact than the same size increase in the latter sector. This
analysi.:; allows for the ranking of multipliers according to their magnitude and, consequently, their
impact on the whole economy. The same type of analysis can provide predictions as to the impact of
a specific increase (or decrease) in one sector on the level of employment, income, and pollution in
the city. .
'\.
In comparing multipliers one should be aware, however, that the multipliers must be interpreted with
caution. Comparisons should be done with prudence, since the size of multipliers for different areas
cannot be compared in a straightforward one. The size of multipliers vary according to several factors
among which two are of crucial importance: the size of the area and the nature of the initial spending.
Large areas tend to exhibit larger multipliers than small areas as large economies are usually more
integrated than little ones. The nature of the injection (initial spending) is also of great important in
determining the magnitude of the impacts expressed in the multipliers. Spending in bed and breakfast
establishments, for instance, often is associated with high multipliers because payments commonly
go directly into the hanqs of local .operators who, in turn, usually acquire the majority of inputs
locally. Service sectors, in general, yield high multipliers as they are usually local sectors. This is
certainly one of the advantages of Miami Beach City's specialization in the service industry.
All the multipliers (output, income, pollution, employment and government revenue) can be used for
a variety of impact analysis. Multipliers enable planners to estimate both the direct, indirect, and
induced effects of various growth or decline scenarios, providing a better assessment of benefits and
costs to the region. This information can ben used to encourage a specific industry or sector to locate
or develop in the region on the basis of how much the new industry would stimulate other industries
or sectors already in the area. Ifproviding new jobs is a goal of the city, for instance, tourism planners
can use the employment multipliers to estimate the potential increase in jobs citywide from an increase
in output in the tourism-related sectors of hotel and lodging, eating and drinking establishment, and
amusement. The same can be done with the arts sector as well as with any other sector of the
economy.
As evidenced above, an input-output study for the City of Miami has the potential to be the central
component of any planning exercise (be it tourism or recreation planning) since it provides valuable
information for policy formulation and planning at the local level. Any proposed or suggested changes
in final demand for an industry can be converted into estimates of the direct, indirect and induced
impacts on local income, output, employment, pollution, and government revenue. Such information
could be useful in making economic development and fiscal decisions in determining possible impacts
of public expenditures on economic sectors such as the arts, tourism, and recreation.
r
Scheduling
,
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The model will be completed in 6 (six) months after the coritract is signed.
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I
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APPENDIX
FIGURE 1
.
\
..
t
..
\,
FIGURE 1
BASIC STRUCTURE OF THE INPUT-OUTPUT MODEL
Intermediate Demand Final Demand Goods and Services
Productive Sectors Final Demand Sector
Sales!
Purchases 1 2 3 4 5 6 H I G E
Agriculture 1 all al2 an aI' alS al6 Cl II G( El Xl
Industry 2 ~l ~2 ~ ~4 ~s ~6 C2 12 G2 E2 X2
Services 3 ~l a32 a33 a34 a3S a36 C3 13 G3 E3 X3
Turism 4 a'l a'2 a'3 a44 a,s a46 C, 1, G, E, X,
Arts 5 aSl aS2 aS3 as, ass aS6 Cs Is Gs Es Xs
Entertainment 6 ~l ~2 ~3 a64 ~s ~ C6 16 G6 E6 ~
Salaries Sl S2 S3 S, Ss S6 Sc SI SG SE S
Profits PI P; P3 P, Ps P6 Pc PI PG PE P
Taxes Tl T2 T3 T Ts T6 Tc TI TG TE T
,
Imports Ml M2 M3 M, Ms ~ Me M( Ma Me M
Total Inputs Xl X2 X3 X, Xs ~ C I G E X
where
au. = Matrix of technical coefficients (a;,. = X;P9
X = Total output
C = Household consumption
I = Investment
G = Government consumption
E = Exports
M = Imports
P = Profits (capital income)
T = Taxes
Final Demand Sectors (Y):
C = Household consumption
I = Investment demand
G=Govenunentconsumption
E = Exports demand
t
Budget
.
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Construction of economic impact model, including the acquisition of
the national Input-Output Model from the Department of Commerce
It is agreed that the City of Miami Beach will provide assistance in
contacting businesses to provide information on the main sectors studied
(Arts and Entertainment, Tourism related activities). It is also agreed
that the City of Miami Beach will provide one assistant to survey these
businesses in order to obtain the necessary information to construct the input-
output table. This task is expected to consume about 100 hours oflabor.
This type of task does not require highly skiled labor since I will train the
person. I will provide the questions to be asked and will supervise their work.
$23,500