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Conceptualizing the Local Economy. The most common theory planners use to conceptualize and then analyze the local economy is Economic Base Analysis . The local economy is conceptualized as having two sectors of activity:.

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Conceptualizing the Local Economy

  • The most common theory planners use to conceptualize and then analyze the local economy is Economic Base Analysis.
  • The local economy is conceptualized as having two sectors of activity:

Basic Sector (aka Non-local Sector): Consists of firms and parts of firms whose economic activity is dependent upon factors external to the local economy.Classic Examples: Manufacturing, Agriculture, Forestry State/Fed Government

Non-Basic Sector (aka Local Sector): Consists of firms and parts of firms whose economic activity is dependent largely on local economic conditions.Classic Examples: Services (Restaurants, Drycleaners), Local Government, TCU, Retail Trade


The Economic Base Technique

  • The economic base technique requires two key assumptions about the local economy:

1) EB assumes that the basic sector is the primary cause of local economic growth; that is, it is the economic base of the local economy.Basic Industries    Non-Basic Industries --Is this a reasonable assumption? --Are there any conceivable times when this assumption might be violated?

2) EB assumes that all local economic activities can be assigned to either the basic or non-basic sector. --How might we assign activities to these two sectors? --What problems might we encounter in making these assignments?


The Base Multiplier

  • One of the primary uses of the EB model is in the calculation of a Base Multiplier which can be expressed as a ratio:

BM = Total Employment Basic Employment

  • For example, when a BM = 15,000/7,900 = 1.9, we estimate that every 1 Basic job creates 0.9 Non-basic jobs. Or every ten Basic jobs create nine Non-basic jobs.
  • Using this approach, analysts can project impacts upon the total economy from expected changes to the basic sector.
  • When using this method, it is usually assumed that the ratio of total local employment activity to basic employment (the BM) is invariant; it does not vary over time.

--What methodological problems might arise from using this technique?

--What problems might arise in the use of an economic base multiplier? --Why do economic developers love these statistics so much?


Undertaking Economic Base Analysis

  • Four key decisions need to be made when undertaking the Economic Base Analysis technique:

1) Area to be Studied (Geography)

2) Unit of Analysis (Measure of the Economy)

3) Data to be Used(Source for Input Data)

4) Technique(s) to be Used (Analytical Method(s))


Choosing a Study Area

  • The choice of study area is important because it directly impacts your results. EB theory tells us that the study area must be a “viable economic entity with integrated, interdependent, and largely self-sufficient productive and distributive activities.” We must have an “identifiable” local economy.
  • A household, for example, is too small because it will have entirely Basic activity because the household economy is almost entirely impacted by factors outside of the house.
  • In contrast, the Earth will have all Non-basic activity because there are no exports.
  • Typical Geographies Used in EB Analysis

County: The most commonly used study area because of excellent data availability

MSA: Best unit for urban analysis; Built on counties, so excellent data availability as well

Economic Region: A shopping area or media area is useful, but poor data availability makes this a rarely used analysis area

State: A study area that is too aggregated and likely to undercount basic sector activity.


Selecting the Unit of Analysis

  • Employment: The number of jobs by industry

Pros: Most widely used; Annual data widely available; Jobs are readily understoodCons: Dealing with part-time employees, seasonal jobs, commuters; Changes in productivity are not considered

  • Payroll: Annual payroll for firms by industry

Pros: Reflects hours worked and wage rates; Recognizes that all jobs are not equal; Good data availabilityCons: Not as readily understood (not jobs); Overemphasizes importance of income in the economy (One $250K job vs. nine $25K jobs)

  • Sales: Dollar sales by industry

Pros: Easily understood by firms and government; Tax revenues are related to salesCons: Can have double-counting; Poor data availability

  • Value Added: Like sales, but eliminates double-counting by subtracting a firm’s purchases from their sales

Pros: Eliminates the double-counting problemCons: Very poor data availability; Difficulty with intangibles of the economy


Selecting the Data Set

  • Similar to selecting the Unit of Analysis, there are several Data Sets available to the Economic Base analyst.

County Business PatternsPros: Available annually; A widely used data set that includes employment, payroll, and salesCons: Derived from a combination of sources; Does not include public administration (Gvt) employment

Economic Census:Pros: An excellent dataset (a census!), Contains employment, payroll, and sales (as well as other data)Cons: Collected only every five years but not available until several years later

ES202 Data:Pros: Available annually and by quarter; Quick data turnaround; Includes employment and payroll Cons: Not always available for all areas; Not available for non- unemployment compensated firms


The Available Analytic Techniques

One of the key steps in this technique is determining which industries should be considered Basic and which should be considered Non-basic. Numerous techniques are available to determine this.

Economic Base Analysis Techniques

  • Assumption Approach: The simplest and most straightforward, this approach assumes that certain industries are Basic or Non-basic.
  • Location Quotients: Related to the concentration concept, this technique determines the local share of an industry.
  • Minimum Requirements: Compares local industry patterns with other similar areas to determine the minimum level of NB employment.
  • Combination: A mix of the above techniques.

Economic Base Projection Techniques

  • Constant share: A naïve approach that simply continues past trends without adjustment.
  • Shift share: An approach that requires the adjustment of an industry share to reflect local and national trends.
  • Adjustments: Additional adjustments/refinements can be made to the projection techniques.