The Basics of the Assumption Approach. Assigns activities to the Basic and Non-basic sectors on the basis of assumed sales patterns for different types of industries. Sectors typically assigned to the Basic sector:
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--Manufacturing--State/Federal Government --Agriculture, Forestry, Fishing--Hotels/Lodging --Mining
Evaluating the Assumption Approach
The Basics of the Location Quotient Technique
Eit/ETtwhere:eit=Local employment in sector i at time teTt = Total local employment at time t
Eit= National employment in sector i at time tETt = Total national employment at time t
1) Industries with LQ’s = 1 (Self-Sufficiency)
2) Industries with LQ’s < 1 (Net Importer)
3) Industries with LQ’s > 1 (Net Exporter)
Evaluating Calculated LQ Values
--In this situation, a given industry’s share of the local economy is the same as the share of that industry in the national economy.
--Local production is assumed to be just sufficient to meet local demand, so all of the employment in this industry is considered Non-Basic.
--In this situation, a given industry’s share of the local economy is less than the share of that industry in the national economy.
--Local production is assumed to be insufficient to meet local demand, so all of this employment is considered Non-Basic.
--In this situation, a given industry’s share of the local economy is greater than the share of that industry in the national economy.
--Local employment is concentrated in these industries (relative to the nation) and is therefore assumed to exceed local demand and any excess production is exported.
--With an LQ > 1, that proportion of the industry that accounts for this excess production is considered Basic Employment.
Calculating a Location Quotientfor Florida’s Entertainment Industry
Calculating a Location Quotientfor Florida’s Information Industry
Calculating Basic Employment with LQ Values
Evaluating the LQ Technique
Overall evaluation --By far the most popular method for studying the local economy, Location Quotients offer a nice balance of control and complexity to the analyst.
--However, the analyst must be careful not to interpret the LQ’s blindly.
--In addition, a number of refinements can be utilized to minimize the impacts of the assumptions underlying this technique.
Combining the Assumption and LQ Approaches
Refinements to the Location Quotient Approach
Consumption
Production
bi = [(ei / Ei) - (et / Et)] Ei
Productivity Adjustment
Basic Employment = [vi(eit/ Eit) - (eTt/ETt)] * Eit/vi
Productivity Adjustment Calculation
Value Added By Industry Division: United States and Florida 1992
ConstructionManufacturingUnited States$134,617,817$1,709,180,300,000Florida $12,025,405 $37,933,600,000
State Value Addedit/State Employmentit
US Value Addedit/US Employmentit
Vi=
Productivity Adjustment Example
Consumption Adjustment
1) Population Ratio Adjustment
Basic Employment = [(eit/ Eit) - (pt/Pt)] * Eit
2) Total Personal Income Adjustment
Basic Employment = [(eit/ Eit) - (yt/Yt)] * Eit
Export Adjustment
Proportion Domestic = (Total Emp - Export Emp)/ Total Emp
Basic Employment = [(eit/ Eit) - di (eTt/ETt)] * Eit
Crosshauling Adjustment
The LQ Adjustments Combined
bit = [ vi (eit/Eit) - di (yt/Yt)] Eit/vi
Equal
ProductivityAdjustment
EqualConsumptionAdjustment
National ExportsAdjustment
The Major LQ Equations
Eit/ETtwhere:eit=Local employment in sector i at time teTt = Total local employment at time t
Eit= National employment in sector i at time tETt = Total national employment at time t
bit = [(eit/ Eit) - (eTt/ETt)] * Eit
bit = [ vi (eit/Eit) - di (yt/Yt)] Eit/vi
Equal
ProductivityAdjustment
EqualConsumptionAdjustment
National ExportsAdjustment