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Economic Analysis Methods for Planners Standard Industrial Code Classifies all U.S. industries by 4-digit code Industries can also be aggregated to 3-digit SICs or 2-digit SICs

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Economic Analysis Methods for Planners

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Economic Analysis Methodsfor Planners


Standard Industrial Code

  • Classifies all U.S. industries by 4-digit code

  • Industries can also be aggregated to 3-digit SICs or 2-digit SICs

  • Summing all 4-digit industries should produce the same total as summing all the 3-digit industries or 2-digit industries

  • For a full SIC listing see http://www.smartbiz.com/sbs/arts/sbs80.htm


Sample SICs

  • 25 Furniture And Fixtures

  • 251 Household Furniture

  • 2511 Wood household furniture

  • 2512 Upholstered household furniture

  • 2514 Metal household furniture

  • 2515 Mattresses and bedsprings

  • 2517 Wood TV and radio cabinets

  • 2519 Household furniture

  • 252 Office Furniture

  • 2521 Wood office furniture

  • 2522 Office furniture, except wood


SIC Major Industry Divisions

  • Division A. - Agriculture, forestry, & fishing (01-09)

  • Division B. - Mining (10-14)

  • Division C. - Construction (15-17)

  • Division D. - Manufacturing (20-39)

  • Division E. - Transportation & pub. utilities (40-49)

  • Division F. - Wholesale trade (50-51)

  • Division G. - Retail trade (52-59)

  • Division H. - Finance, insurance, & real estate (60-67)

  • Division I. - Services (70-89)

  • Division J. - Public administration (91-97)

  • Division K. - Nonclassifiable establishments (99)


NAICS, the SIC Replacement

  • New North American Industry Classification System is replacing the SIC

  • See this Web site for details http://www.census.gov/epcd/www/naics.html

  • 1997 Economic Census is in NAICS

  • Problems of time-series, conversion

  • See the URL above for NAICS-SIC conversion information


Economic Base Theory

  • Economy is made up of two components:

    • Basic (or export): sells outside of region

    • Service (or non-basic): sells inside region

  • Basic sector is key to region’s economic health

  • Expansion or decline in basic sector leads to overall expansion or decline

  • Economic base multiplier is ratio of total employment to basic employment. It tells how many total jobs are created from the addition of one basic job.


Illustrative Base Multipliers

---------- SIC Digits ---------

Place/Year1&2 2-dig3-dig4-dig

----------------------------------------------------------------

Philadelphia 77 ---9.116.045.15

Washington DC 77 ---2.972.812.80

Monmouth Co NJ 77 ---5.163.883.50

Wilmington NC 876.85

Charlotte NC5.76


Methods for Calculating Base Employment

  • Direct method: survey of local firms

  • Sector assignment: agricultural, mining, manufacturing, and federal government are usually assigned to basic sector

  • Location quotients: all LQs above 1 are export

  • Minimum requirements: LQ comparison to minimum sector employment in similar areas

  • Regression approach: prediction model for each sector


Location Quotient Calculation

  • For any one year, in each industry calculate

    • (a) Local industry emp. / total local emp.

    • (b) National industry emp. / total national emp.

    • Divide (a) by (b)

  • Meaning of LQs

    • Equals 1.0:local importance = national importance

    • Under 1.0: local importance < national importance

    • Over 1.0: local importance > national importance

  • Often LQs over 1.0 are taken to mean basic (export) industries


Economic Base Multipliersfrom Location Quotients

  • To estimate basic employment in each industry:

  • Calculate what local employment would be if LQ = 1.0

    • LQ1Emp = (NatIndEmp / NatTotEmp) * LocTotEmp

  • Calculate “excess” employment from LQ > 1.0

    • ExcessEmp = LocIndEmp - LQ1Emp

  • For all industries, add “excess” employment to calculate total basic employment (TotExcessEmp)

  • Calculate economic multiplier

    • LocTotEmp / TotExcessEmp


Employment Projection with Multipliers

  • Calculate base multiplier

  • Calculate future basic employment through trend extrapolation or other method

  • Multiply future basic employment times multiplier to calculate total future employment


Shift Share Analysis Theory

  • Divides employment change in each industry into three components

  • Total local industry growth is “explained” by analysis of the different components

  • Sum of three components must equal actual growth

    • National growth: how much would employment have grown if it equaled total national employment growth?

    • Industrial mix: individual national industries grow faster (sunrise industries) or slower (sunset industries) than total national growth. If the


Shift Share Analysis Data

  • Need employment by industry for two comparable time periods

  • Use REIS or County Business Patterns or Economic Census data

  • See course home page for links to Oregon State and Univ. of Virginia Web data sites

  • Gwinnett County example will use 1987 and 1997 REIS data


Three Shift Share Components

  • (1) National growth component:

    • how much would employment have grown if it equaled total national employment growth? (NatRate * LocIndEmp at period start)

  • (2) Industrial mix component:

    • Individual national industries grow faster (sunrise industries) or slower (sunset industries) than total national growth.

    • Calculate the difference between the national industry growth rate and national total growth rate (NatRateDif)

    • Multiply NatRateDif * LocIndEmp at period start


Three Shift Share Components

  • (3) Local share component

    • Calculate actual local industry employment change over the period (change = [LocIndEmp at end] - [LocIndEmp at start]

    • Subtract components (1) and (2) from the change

    • Result is local share component

    • Local share component is interpreted to reflect local competitive advantage

  • Add three components to ensure they sum to actual change


Forecasting Employment with Shift Share

  • Secure future projections of national total employment and national industry employment, or use existing trends

  • For each industry

    • Calculate LocSharePct as (local share / LocIndEmp at start of period)


Forecasting Employment with Shift Share

  • Using local industry employment at the end of the period calculate three components

    • (1) National growth: LocIndEmp * Projected national growth percent

    • (2) Industrial mix: LocIndEmp * (ProjNatIndEmp growth percent- ProjNatTotEmp growth percent)

    • (3) Local share: LocIndEmp * LocSharePct

  • Sum three components for total projected industry change


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