Setting a Local Purchase Percentage (LPP)

INTRODUCTION

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 PURCHASE PERCENTAGE (LPP)

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 the 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 being analyzed 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.

REGIONAL PURCHASE COEFFICIENT (RPC)

A Regional Purchasing Coefficient (RPC) is the percent of Total Demand that is met by Local Supply for a given Commodity in the Region. The RPC is the value used when LPP is set to the Social Accounting Matrix (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.

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EDITING THE LPP

In some situations users may want to set LPP to a specific value because more  detailed purchasing information is known. 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. 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 it may be more appropriate to let IMPLAN determine what portion of the production may affect the local Region by setting the LPP to SAM. In other instances a user may know exactly how much of the Commodity was purchased locally, in which case it may be appropriate to set a user-defined value.

The LPP for Commodity Events is by default set to 100% for Non-Marginable Commodities, simply toggle the LPP to SAM or overwrite the 100% with a user-defined LPP. 

For Marginable Commodity Events, the default is already set to Regional Purchase Coefficient (RPC) or Social Accounting Matrix “SAM” value. Users can alter any Commodity in the Value Chain by clicking Edit to open the Margin window to change to 100% or overwrite with a user-defined LPP. 

SPENDING PATTERN EVENTS

Industry, Institutional, and Custom 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 for these Events has the 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 when more information is known on where the purchased Commodity was produced. 

To change an LPP for any Spending Pattern Event, click on Advanced Fields to open the list of Commodities. Use the LPP dropdown to select User Value, then change the value to the known LPP. This can be done for all Commodities in the Spending Pattern at the top of the list or can be set on an individual Commodity within the list. Read more about Editing Spending Patterns.

INDUSTRY IMPACT ANALYSIS (DETAILED) EVENTS

In an Industry Impact Analysis (Detailed) Event (IIA), the full list of Intermediate Inputs or the Industry’s Spending Pattern can be explored. It is common that the location of production of a purchased Commodity is unknown, in which case it can be more appropriate to 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. Setting the LPP to 100% or a user-defined value is the same process as outlined for the Spending Pattern Event.

To change an LPP for any Spending Pattern Event, click on Advanced Fields to open the list of Commodities. Use the LPP dropdown to select User Value, then change the value to the known LPP. This can be done for all Commodities in the Spending Pattern at the top of the list or can be set on an individual Commodity within the list. 

EXAMPLE OF LPP CALCULATION 

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 3001 Oilseeds, a Non-Marginable Commodity has a value of $1,000,000. If Local Purchase Percentage is set to 50% then the Direct Effects will be less than $500,000 of Output. Why?

  • First, 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.
  • Then, IMPLAN multiplies the Event Value by the Local Purchase Percentage ($1,000,000 * 0.50 = $500,000)
  • The resultant value is applied to each producing Industry’s Multipliers based on their Market Share of the supply, to determine the Indirect and Induced Effects. If an Institution is a producer of the Commodity, then that value will be treated as a leakage.
  • 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 Commodity Event for 3002 Grains, a Marginable Commodity has a value of $1,000,000, set to Purchaser Price. If Local Purchase Percentage is set to 50% for all Margined Commodities in the Value Chain, the Direct Effects will also be less than $500,000. However, the process is slightly different for Marginable Commodities.

  • First, 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.
  • Next, IMPLAN multiplies the Event Value by Margins in the Value Chain. For Commodity 3002, 71.4% goes to producers, 0.9% goes to wholesalers, 17.1% goes to retailers, and 10.6% goes to Transportation. (for producers, $1,000,000 * 0.714 = $714,000)
  • Then, the Local Purchase Percentage is applied to each Margined Value (for producers, $714,000 * .50 = $357,000)
  • The resultant values are applied to each producing Industry’s Multipliers based on their Market Share of the supply for each Commodity in the Value Chain, to determine the Indirect and Induced Effects. If an Institution is a producer of the Commodity, then that value will be treated as a leakage.
  • 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.

Written August 30, 2023