Economic Base Analysis and Location Quotients

1
Economic Base Analysis and Location Quotients

• Chapter 8 in Regional and Local Economic
  Analysis for Practitioners, Avrom Bendavid-Val
  and Chapter 7, pages 73-76

2
Definitions

• Basic Industry - Those industries that produce
  goods and services ultimately sold to consumers
  outside the region.
• Non-basic Industry - Those industries that
  produce goods and services that are consumed
  locally.
• Multiplier - Ratio of total economic activity to
  basic economic activity.

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Basic/Non-basic Theory

• A regions export industries are its economic
  foundation, and all other industries thrive by
  servicing the export industries and one another.
• A change in the basic sector will lead
  automatically to a change in the same direction
  in the non-basic sector.
• The ratio of non-basic to basic activity is
  reasonably stable over the long term.

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Geography Matters

• As you enlarge the region under study from a city
  to a county .

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Geography Matters

• And then to a multi-county area and finally to a
  state, what is basic and what is non-basic can
  change.

6
Basic/Non-basic Theory

• It follows that if a region can increase the
  level of basic employment, it can increase total
  employment by that amount times the multiplier.

7
Estimating Economic Base

• Judgmental approach

8
Judgmental Approach

• Analyst decides which industries are basic and
  which are non-basic
• Easy for some industries, hard for others
• Groceries and dentists surely local
• Printing company local paper vs. encyclopedias

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Judgmental Approach

• Pros
• Easy to do from published data
• Cons
• The title alone states the primary problem
• Can vary from analyst to analyst

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Estimating Economic Base

• Judgmental approach
• Survey method

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Survey Method

• Conduct a sample survey to measure the size of
  the flow of resources into and out of the region
  in question.
• Determine the share of output flowing outside the
  region, for each company.
• Use these shares with company employment (after
  weighting) and sum across companies.

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Survey Method

• Pros
• Derived from actual company-specific data in a
  given region.
• Cons
• High cost to administer.
• Very difficult to garner cooperation from firms.
• Sampling error to deal with.

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Estimating Economic Base

• Judgmental approach
• Survey method
• Location Quotients

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Location Quotients

• Statistic that measures the relative
  concentration of a given industry in a given
  place.
• Calculated by dividing the proportion of the
  areas economic activity in an industry by the
  proportion of the nations economic activity, in
  that same industry.
• Employment used most often, but income or wages
  and salaries can also be used.

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Location Quotients

• eir employment in some industry (i) in some
  region (r)
• Seir total employment in the region
• Ei national employment in some industry (i)
• SEi total national employment

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Location Quotient Example Calculation
Location Quotient (eir/Seir) / (Ei/SEi)
Location Quotient (.012676 / .004813) 2.63
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Location Quotient Assumptions

• Patterns of consumption do not vary
  geographically.
• Labor productivity does not vary geographically.
• No cross-hauling simultaneous importing and
  exporting of a product in a region.
• No international trade exports from the
  benchmark region (U.S.) distort location quotients

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Location Quotient Values

• Location quotient 1
• Local production can just satisfy local
  consumption.
• Location quotient gt 1
• Local production can satisfy local consumption,
  and the excess is exported. This is a basic
  industry.
• Location quotient lt 1
• Local production can not satisfy local
  consumption, and the difference must be imported.

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Location Quotient

• Not all of a basic industry is basic.
• Only that part of the industry that serves the
  export market is considered basic.
• It is that part of the industry that raises the
  location quotient above 1.0

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Using Location Quotients to Estimate Basic
Employment

• The location quotient equation can be used to
  estimate basic and non-basic employment.

1. (eir / ?eir ) / (Eir / ? Eir ) 1.0 2. (eir
/ ?eir ) (Eir / ? Eir ) 3. eir (Eir / ? Eir
) ?eir (See page 80 in textbook) Where eir in
this equation is non-basic employment and basic
employment is actual minus non-basic employment.
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Calculating Basic Employment Using Location
Quotients
Location Quotient (.011269 / .000506) 22.3
Non-basic Employment (.000506) 3,146,681
1,592
Basic Employment 35,461 1,592 33,869
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Location Quotients

• Pros
• Easy to use simple calculations.
• Allows estimation of the basic sector without
  direct observation of the inter-industry flow of
  goods.
• Employment data are easy to obtain.
• Cons
• Resulting basic employment is often biased
  downward (because of cross-hauling problem) and
  tends to show extremes at the local level.

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Estimating Economic Base

• Judgmental approach
• Survey method
• Location Quotients
• Minimum Requirements

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Minimum Requirements

• A variation on the Location Quotient approach.
• Uses the minimum industry employment ratio
  (E(i)/E) among all regions instead of the U.S.
  industry ratio.
• Not used in practice. An example can be found at
  http//garnet.acns.fsu.edu/tchapin/urp5261/topics
  /econbase/min-req.htm

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Location Quotients

• eir employment in some industry (i) in some
  region (r)
• Seir total employment in the region
• Ei national employment in some industry (i)
• SEi total national employment