Local Purchase Percentage (LPP) and Regional Purchase Coefficients (RPC) are two of the most frequently misused and misunderstood values in IMPLAN. This article describes what these concepts mean and when they should be changed from the default settings.
Local Purchasing Percentages (LPP) indicates to the software what portion of the Event Value affects the local Region and should be applied to the Multipliers. The key thing to remember when considering Local Purchase Percentage is that the LPP modifies only the Event values, and it does this before those values are applied to the Multipliers. When LPP is less than 100%, the remaining portion (or 1-LPP) is then assumed to be affecting a different Region. The portion happening outside the Region of your analysis is considered a leakage and does not create any local effect. LPP cannot be edited in most Event Types and is assumed to be 100%.
If a Region has been properly defined then in most circumstances the business or Industry you are analyzing is local because the operations are based in the Selected Region and thus LPP should be 100%. Employment in IMPLAN is based on place of work, so Employment and Labor Income should be considered local for employees working for a local business that is in the Selected Region, even if they do not live there. IMPLAN will estimate how much of the Employee Compensation portion of Labor Income is earned by non-residents, based on the in-commuting rate for the Region. IMPLAN will estimate local employees' purchases that will be made outside of the Region based on the RPCs for all of the Household Spending. IMPLAN will also estimate what portion of the Industry's Intermediate Inputs will be purchased outside of the Region based on the LPP for each Commodity. Hence, the RPC for each Commodity in a Region in IMPLAN is an Average RPC; regardless of the purchaser, the RPC is the same rate.
EDITING THE LPP
In some situations you may want to set LPP to a specific value because you know detailed purchasing information. LPP can be edited in the following Event Types as detailed below, followed by an example and further explanation of RPCs.
Commodity Output Events
Commodity Output Events are used to model a purchase or purchases of a certain Commodity. The LPP for Commodity Events is by default set to 100%. When the Commodity is known to be produced in the Region, leaving LPP at 100% is appropriate. It is common that the location of production of a purchased Commodity is unknown, in which case you can let IMPLAN determine what portion of the production may affect the local Region by selecting the SAM Checkbox next to the LPP field in the Advanced Fields Menu. Selecting the SAM Checkbox sets the LPP to the RPC for the given Commodity.
Spending Pattern Events
Industry Spending Pattern and Institutional Spending Pattern Event Types start the analysis, not from the standpoint of the sales or Employment of the Industry or Institution, but instead from the budgetary purchases of goods and services made by the local organization. The LPP in an Industry or Institutional Spending Pattern tells the software what portion of each Commodity was purchased locally and therefore affects the local Region. The default setting has LPP set to SAM. When LPP is less than 100%, the remaining portion (or 1-LPP) is then assumed to be affecting a different Region. The portion happening outside the Region of the analysis does not create any local effect.
Unlike the Industry or Institution itself, we typically cannot say where the production, transport, and wholesaling of the items purchased by our target organization was sourced, and we would not want to assume that these are local purchases. Since this methodology, unlike a Commodity Event, starts not from the Commodity itself, but from the first round of spending, the LPP on these purchases needs to reflect local availability. Only change the LPP on the Commodities within a Spending Pattern if you had information on where the purchased Commodity was produced.
Industry Impact Analysis (Detailed) Events
In an Industry Impact Analysis (Detailed) Event (IIA), the full list of Intermediate Inputs can be explored. It is common that the location of production of a purchased Commodity is unknown, in which case you can let IMPLAN determine what portion of the production may affect the local Region by leaving the default set to SAM. This sets the LPP to the RPC for the given Commodity. When the spending on each Commodity in the list of Intermediate Inputs is known to be produced in the Region, setting LPP at 100% is appropriate.
To help envision this more clearly, we can take a look at a quick example to see how the software uses Local Purchase Percentages.
A Commodity Event for Sector 3001 Oilseed Farming has a value of $1,000,00. If Local Purchase Percentage is set to 50% then the Direct Effects will be $500,000 of Output. Why?
- To calculate, IMPLAN first multiplies the Value by the Local Purchase Percentage ($1,000,000 * 0.50 = $500,000)
- Deflators are applied to adjust the entered value down to the year of the data set. This makes the dollar values used to calculate the Multipliers equivalent to the entered dollar values.
- The resultant value is applied to the Multipliers to determine the Indirect and Induced Effects.
- Thus, the LPP does not provide any information about any of the items purchased by Industries who produce that Commodity in the Event field. Regional availability of Intermediate Inputs and Indirect Effects are determined by the Regional Purchasing Coefficient for each producing Industry.
A Regional Purchasing Coefficient (RPC) is the percent of Total Demand that is met by Local Supply. The RPC is the value used when LPP is set to the SAM Model Value. In more detail, it is the proportion of the Total Gross Demand for a Commodity, by all users in the Region, that is supplied by producers located within the Region.
With the addition of the option to edit margins, another improvement was made to IMPLAN. Before the release of Version 6.7 on June 8, 2022, in Commodity Events which have margins (Purchaser Price), the LPP on each of the margined Commodities was always using 100%. This means that the entirety of the spending on these Commodities was assumed to be in Region, which isn’t really reasonable. As we are always looking to improve our methodology so our users have the most accurate Results, this was updated. Now, the default for the LPP is the SAM value instead of the 100%. Remember, the SAM value utilizes the Regional Purchasing Coefficient (RPC) for the Region. The RPC tells the application how much of each Commodity demanded by folks in the Region is met by local firms. So, setting the LPP to the SAM/RPC value is a far more defensible assumption.
You can edit the LPP by clicking EDIT next to Margins on the Advanced Fields. You can change them all by entering a value on the top row or edit individual Commodities on the line for each. You can select the SAM value by clicking the box on the right.
If you ran a Marginable Commodity Event (set to Purchaser Price) before the update, your Results will reflect the LPP set to 100%. If you re-run these Projects, the new methodology where LPP is set to SAM or any custom percentage will be applied.
Written August 23, 2019
Updated July 18, 2022