Download
1 / 18
230 likes | 507 Views
ECONOMIC DEVELOPMENT PLANNING. TOPICS. Economic base model The multiplier effect Assumption Approach The location quotient methodology The shift and share methodology Input-output. A SYSTEM MODEL OF ECONOMIC DEVELOPMENT. Capital, goods and labor. JOBS. JOBS. LABOR. LAND. G & S.
E N D
TOPICS • Economic base model • The multiplier effect • Assumption Approach • The location quotient methodology • The shift and share methodology • Input-output
A SYSTEM MODEL OF ECONOMIC DEVELOPMENT Capital, goods and labor JOBS JOBS LABOR LAND G & S CAPITAL WEALTH WEALTH Urban Planning
BASIC ASSUMPTIONS • Exports to the rest of the world are the engine of growth of the local economy and these are considered the economic base of the system. • Imports from the rest of the world to the local economy represent leakages from the system. • The multiplier effect of expenditures at the local level is what makes the economic system work.
THE MULTIPLIER b=marginal propensity to consume If savings is .4 then b=.6 therefore m=2.5 Which means that for each dollar coming into the economy, 2.5 dollars are generated of income
THE MPC AND THE MULTIPLIER MPC MULTIPLIER .5 2 .75 4 .90 10 .99 100
THE LABOR SIDE OF THE MULTIPLIER • TOTAL EMPLOYMENT = BASIC + NON BASIC • BASIC IS REPRESENTED BY FIRMS EXPORTING GOODS PLUS GOVERNMENT • THE NONBASIC IS REPRESENTED BY FIRMS SERVING THE LOCAL MARKET • THEN THE BASE MULTIPLIER IS THE RATIO OF THE TOTAL EMPLOYMENT TO THE BASIC EMPLOYMENT
BASIC? NON BASIC? • The economic base model divides the economy into basic and non basic employment. How do we identify and differentiate between basic and non basic employment? • The assumption, the location quotient, and shift and share are widely used methods to identify and differentiate between the basic and non basic employment
THE BASIC ASSUMPTION METHOD • We start by classifying industries that most likely will be engaged in “exports” to the outside world and we assume this to be the basic employment • Basic employment will be those such as manufacturing, mining, agriculture and federal and state government.
LIMITATIONS OF THE BASIC ASSUMPTION METHODOLOGY • The way the basic sectors and non basic sectors are identified is very subjective. • It is safe to think that at least some proportion of the non basic sector is produced for consumption outside the local economy. • Based on the above limitations we need a better method.
THE LOCATION QUOTIENT (LQ) e= local employment i= industry i t=time T=total employment E=National or State
THE LOCATION QUOTIENT (LQ) The numerator in the LQ is the percentage of employment of industry i with respect to the total local economy The denominator in the LQ represents the percentage of employment of industry i with respect to the reference unit (National or State) Then if the LQ is less than 1 it means that it is a non basic sector but if LQ is greater than 1 we counted it as basic employment.
CONSTANT SHARE ei=local employment industry i Ei= employment industry i reference region t=base time t’= t+1 Ri= rate of growth reference region
CONSTANT SHARE LIMITATIONS • It assumes that the rate of growth of the local economy will be the same as the reference region • The above is a limitation of the method because we know that often the local economy and the reference region move at a different pace. • Therefore it is important to capture the differences (S) of the local and reference region.
SHIFT & SHARE S = differential between local and reference region
DIRECT COEFFICIENTS BUYER S E L L E R S
