Understanding the local economic impacts of natural capital investment

This report outlines new economic analysis that quantifies the typical contributions to local economies, measured as output and jobs created, from four key natural capital investments, including peatland restoration and woodland creation.


Input-Output (I-O) Model

Input-Output (I-O) analysis is an empirical tool designed to analyse the interdependencies of economic sectors. The I-O table describes the flows of goods and services through an economy in monetary units for a given time period, usually a year. The I-O modelling approach can be used to estimate the effects on employment resulting from an increase in final demand for the product or service in a given industry. I-O models can estimate the economy-wide employment results from a given level of spending.


The ripple effects of spending on natural capital related activities can be estimated using multipliers. Multipliers are measures of the way in which an increase in activity by one firm will lead to an increase in activity by other related firms. Multipliers are estimated by indirect means, using Input-Output (I-O) tables. They are calculated by using the estimates for direct, indirect and induced effects, which are also estimated from I-O tables:

1. Direct effect: defined as an increase in demand for the goods produced by any sector leading to an increase in the output of goods from that sector;

2. Indirect effect: as producers increase their outputs in any sector, their suppliers will also have an increase in demands for their goods, and so on. The shock of the increase in final demand for that good then ripples through the supply chain; and

3. Induced effect: as a result of these supply chain effects, the level of income in the economy will increase, and a portion of this income will be spent on other goods and services leading to further increases in demand. This is termed an induced income effect.

Standard Industrial Classification (SIC)

The UK Standard Industrial Classification of economic activities, abbreviated as UK SIC, is a five-digit classification providing the framework for collecting and presenting a large range of statistical data according to economic activity.

Output effect

The direct and indirect impact of any expenditure in the local economy (measured by multiplying financial cost of the intervention by the Type 1 output multiplier).

Employment effect

The impact on jobs attributed to just the direct financial expenditure of the intervention (measured by multiplying financial cost by the Type 1 Employment effect).

Employment effect (Direct + indirect)

The impact on jobs attributed to the Output effect of the intervention (measured by multiplying output effect by the Type 1 Employment effect).


Email: peter.phillips@gov.scot

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