About the Economic Impact Model
Regional Economic Models, Inc. (REMI), based in Amherst, MA, produces economic modeling software that enables users to "answer what if questions" about their respective economies. Each REMI model is tailored for specific geographic regions by using data, including employment, demographic, and industry data, unique to the modeled region. The Center for Economic & Business Development uses the Oklahoma REMI model, which is a six region, 53 sector REMI model, to forecast how a given economic activity or policy change occurring in one region would affect that region, a group of regions, and/or the state.
The REMI simulation model uses hundreds of equations and thousands of variables to forecast the impact that a economic/policy change has upon an economy. As can be seen, the REMI model contains five "blocks". Each block has its own variables and interactions so that changing any one variable in the model not only affects other variables in its own block, but also variables in other blocks. For example, if XYZ Corporation expanded its operations in Oklahoma City by hiring an additional 100 new employees, then that initial employment increase would ultimately affect output, population, migration, wage rates, etc. It is through the model's linkages and interactions that employment's (in Block 2) direct effects upon optimal capital stock (Block 2), employment opportunity (Block 4), and real disposable income (Block 1), that the employment gain works its way through the model to affect each of the other variables.
Commenting first on employment's positive effect upon optimal capital stock, this variable will increase from an employment gain because (1) some new employees will demand newly constructed houses, and (2) physical capital will be required to assist the labor to produce output. Optimal capital stock interacts with actual capital stock (not shown) to affect the level of investment (Block 1) in the model which ultimately increases Oklahoma City's output (Block 1). Higher optimal capital stock when compared to actual capital stock spurs investment in the region since the difference represents unfulfilled demand for physical capital. And output (Y) increases since it is equal to the sum of personal consumption (C), state & local government spending (G), investment (I), net exports from the region (X-M) as well as demand for intermediate inputs.
Commenting next upon employment's effect upon employment opportunity, this variable increases because 100 new jobs have been created in the economy. An increased employment opportunity will positively affect wage rates (Block 4) if the region's employment is growing faster than the region's labor force (Block 3). Wage rates interact with the consumer price deflator, which is an adjustment factor accounting for differing inflation rates in various regions, to affect real wage rates (Block 4). Higher real wage rates in one region compared to another region serve as an incentive for people to move between geographic regions; thus real wage rates affect migration (Block 3).
Commenting last upon employment's effect upon real disposable income (Block 1), as jobs are created, income paid to the new employees also increases. The newly employed will save a portion of their income and spend a portion of their income upon consumer goods, the latter of which increases consumption (Block 1). As a component of output, increased personal consumption produces a subsequent rise in output.
Obviously, the previous example is only a simple illustration of a more complex model. For more information about the REMI model and its equations, please read Regional Economic Modeling by George Treyz (Kluwer Academic Publishers, 1993.)